My five-year-old son just made $1,000. I’m going to help him turn it into $76,000.
Let me explain.
In May of 2020, while offices and daycare facilities were still closed, my wife and I found ourselves adjusting to working from home with a child. As this became the new norm, we attempted to create a more productive workspace in the basement. To help with this, we purchased and assembled a bookshelf, two ergonomic chairs, and a work desk. Since our then three-year-old son was home with us and wanted to play, we pretended to let him help us put it all together. And we snapped a picture of him working beside me and posted it to social media.
It racked up over 500 likes on Instagram—but little did we know, there was a more valuable prize to be won.
We were soon contacted by a company that specializes in finding content on social media and licensing it to brands for marketing purposes. They encouraged us to sign up for their service and despite our initial hesitation, we agreed. Nothing happened at first. Then, two years after the picture was published, they told us a brand was interested in licensing the image and offered us $1,000 to let them use it for a marketing campaign. We agreed.
Since our son was the real reason the picture was interesting, we knew exactly what to do with this surprise windfall of money.
Make Your Children Wealthy by Investing for Them
As parents who are passionate about wealth building, we’d recently opened a custodial brokerage account for him, something we’d long wanted to do. These types of accounts are sometimes referred to as UTMA/UGMA accounts, which are acronyms for Uniform Transfers to Minors Act and Uniform Gifts to Minors Act: the pieces of federal legislation that allow assets to be passed onto children without establishing a formal trust.
Our son is only five years old and not in a position to make investment decisions, but custodial accounts allow us to invest money he receives or earns on his behalf until he reaches a certain age. That age differs, state by state, and when it’s reached, control of the account passes from the custodians of the account (likely parents or legal guardians) to the child. In Georgia, where we live, that will happen when he turns 21 years old. In some states like California and Louisiana, the transferring of account ownership occurs when the child turns 18.
Since we’ve already established and funded his Georgia Path2College 529 Plan for our son’s future education needs, we figured the custodial account was a great way to invest money for him that offered greater flexibility. Unlike a 529 account, money from a custodial account can be used for anything, not just qualified education expenses. And since this money was unexpected, we chose to treat it like a gift with the goal of making it grow into something greater for him in the future. It could be used to help start a business, support social causes or to purchase his dream car. Whatever he chooses, to help make that dream come true, we knew we needed to invest it.
Custodial accounts are helpful in helping children start to build wealth early.
Our Investment Picks
Our preferred approach to investing is in total stock market index funds because they’re diversified and affordable relative to costlier actively managed funds. But in this case, we’re willing to assume greater risk and higher expense than we’re accustomed to, given the money wasn’t expected and will have plenty of time to grow. Ultimately, we chose to invest the entire $1,000 into FSPTX, Fidelity’s Select Technology Portfolio. This is a tech-sector mutual fund, meaning it comprises tech stocks like Apple, Microsoft, Salesforce, and Cisco Systems. Given my own experience in seeing tech companies grow into massive global enterprises over the last 20 years, there’s little reason to believe their growth won’t continue well into the foreseeable future.
In the last three years, the average annual total return for this fund was 23.27%, and the average 10- year annual rate of return was 18.94%. This means, assuming no further contributions, if we’d made this $1,000 investment three years ago, it would be worth $1,873 today. If we’d made the $1,000 investment back in 2012, it would be worth just under $5,700. For our son, assuming we don’t touch the $1,000 until the custodial account is legally required to be transferred to him in 2038 and factoring in the lifetime annual rate of return of 13.49%, this surprise windfall of money will grow to be $7,573.
If we stick to our plan, which is to fund his account with $100 every month until then, it’ll grow to over $76,500.
Three Steps to Opening a UTMA
Opening a custodial account is pretty simple and can be done quickly online. You’ll need basic information like the child’s name, birthday and Social Security number. Secondly, you’ll need to provide the same information for the custodian (or custodians, assuming you want multiple adults to have access and control over the money). Lastly, you’ll need to link the new account to a funding account like a personal checking or savings account. Once that’s done, it’s as easy as processing a transfer and selecting the stocks or mutual funds you’d like to invest in.
As a Black man and someone who grew up on the edge of poverty, I take tremendous pride in my role as a father and in breaking the cycle of struggle I was born into. It’s my job to teach my son how to make good decisions, how to treat others well, and how to navigate the environments that surround him. This deep sense of accountability extends much further than just teaching him how to brush his teeth or put his shoes on the right feet. It includes how to manage your money well, how to invest wisely and apparently—and how to take decent photography.