How we used ETrade for a modern take on Savings Bonds to invest for “our” kids instead of buying more junk
While we don’t have any children of our own, we have something like 10 nieces/nephews/goddaughters. When I was young, my grandma used to give us savings bonds at Christmas instead of toys; when it was time to buy a car I couldn’t tell you many gifts I’d gotten as a child, but those savings bonds paid off big time and sparked an idea. Birthdays and (especially) holidays have a tendency to sneak up and add up when you’re buying for that many kids. Aside from the fact that I don’t really know what kids are into, I also don’t want to add to the consumerism and materialism they’ll get plenty of exposure to on their own. Enter: ETrade, the savings bond of a new generation.
What are Savings Bonds?
Honestly it’s not within the scope of this article 🙂 I don’t really know or care, it was a great option for my elderly grandma and it introduced me to the concepts of interest and delayed gratification. If you care to learn more, this is what the TreasuryDirect.gov website looks like, which kinda tells me everything I care to know about savings bonds:
Stocks: the Modern Way to Invest for Your Kids
After a particularly wasteful holiday shopping trip to Toys-R-Us one year, I decided it was time to take Grandma’s lesson and do something for the future-kids, since the present-day kids were not hurting for gifts. I researched various options like Child Savings Accounts, 529 plans, etc. but none of them really appealed to me. For one, they’re generally geared towards parents, as opposed to eccentric aunts and uncles like us. Also, for a 529…I am *extremely* disillusioned with the higher education system in the US, and not all kids are cut out for college, anyway (I was not).
I decided to just set up a taxable brokerage account with ETrade (much as I love Vanguard, my goal was to help teach kids about investing and that interface will never fly with Gen Z and younger).
“The Rules”
We’re doing it for the benefit of the kids, so I’m not super worried about tax advantages or any of that, but we follow this little strategy:
- $50/kid for birthday and $50/kid for Christmas (side benefit of spreading cost over the year)
- They’re allowed to take out their “portion” any time after age 16, for any reason
- When they “cash out,” no more contributions are made for them
- We’ll continue contributing for them as long as they leave the money in
- If they can make a compelling argument about a stock, we’ll invest in it!
- We’ll do an “annual report” of sorts detailing the performance over the past year, which provides an opportunity to talk about saving & investing
Only one “kid” has cashed out so far, and she did so at the age of 20 to put towards a very-lightly-used car. One other nephew is over 16 with one more close behind, but so far no indication they want to cash out.
2019 – The Scary Liquidation
The best laid plans, and all…
In 2019 I had an opportunity to start a business. It was essentially risk-free but required more cash than I had on hand to float payroll because of the terms of my subcontracts. After exhausting every option short of loan sharks, I talked with my sisters and got permission to “cash it out” in a way. We had done all this investing for the kids but never really had anything in non-retirement accounts for ourselves.
What we decided on was I would cash out the entire amount ($24,171) and eat the taxes, and increase my contributions to essentially be paying them 9% simple interest for the duration of the “loan.” This was the account right before I clicked the button:
As of 4/2021 they’re almost entirely paid back, but I’m still paying 9% on the entire amount until it’s “paid in full” and treating this like any other consumer debt. Among many other things, it taught me a lesson about illiquid investments being a great way to sleep at night, but not super useful in an “emergency.”
Investing for Kids Taught me About Investing
As you may have guessed, I didn’t have much liquid cash available when I needed it. I’d always been good about saving for retirement in my TSP (and then 401k, and now SEP-IRA) but I had basically nothing in taxable accts at the time.
Savvy readers might note some of the absurd gains on the image above. Since I’m a boring VTI/VTSAX index fund investor and this started so small, the ‘strategy’ was essentially “when a household-name company that I believe in makes headlines for something bad, buy the stock at a discount” – Boeing with the Dreamliner fires, Netflix when they tried to ditch DVDs (yes that was a thing!), Toyota’s “unintended acceleration. All discounts! What I’m most proud of there is Chipotle, though. My niece was a believer, and she told me she thought we should buy when they had a run of bad news about E. Coli. It’s not the biggest gain on the chart but it represents the first “it’s happening!” moment in getting the kids more involved this.
How do you invest for “your” kids?
This is a great idea! Our daughter is pretty young, but about to start school and getting to the age where she is inquisitive about money. We already keep purchasing of toys low (we get too many from other people already), and contribute to a 529, but would be nice to have a plan to show her about saving for something big that she may want in the future… or so she can reach FI earlier than us LOL. Something like this would be a great way to teach her about investing and patience. Perhaps a matching system for any parts of her (soon to get) allowance into investments vs spending.
For sure! I briefly considered the 529 thing but I consider that a parent problem and I have a chip on my shoulder about the US Higher Ed system, so we went this way. We have a whole bunch of nieces and nephews (each with varying interest in this) and have found a different way to connect with a few. The eldest got to pick a few stocks based on what was hot for teenagers in her mind, and then cashed out for a car down payment @20 or 21. Then when she started working she had a baseline and we made a deal like “opt-in to your 401k we’ll venmo you $50. Increase your contribution for another $50. Open an IRA and I’ll give you the first $100.” Little things like that knowing that usually once it’s established you stop thinking about it, it’s the first step that’s a hurdle.
The youngest niece is a future mogul for sure. She’s shown some real interest and is a savvy negotiator for an 8? 9? year old (I’m a terrible uncle). We made a little google doc last year with age-appropriate personal finance questions and said we’d send them $20 for completing the worksheet. She was the only one to take me up on it and she comes back with “How about $50? I know you offered it to my brothers and they didn’t respond so that means you have more and are willing to spend it” XD
Not sure how old yours is but I’d be happy to share the little worksheet and kick n $5 if she completes it 🙂