Anyone with a rudimentary knowledge of how compound interest works will tell you that young investors have the most to gain with regard to this proven financial strategy. Therefore, getting an early start is the best thing you can do.
Billionaire Warren Buffett is a living example of this axiom; not long after his first stock purchase, which he did not hold onto for very long, he started depositing cash into a savings account that paid compound interest. Buffett was still a teenager with a newspaper bicycle route when he made the wise decision to invest early and make routine contributions to his compounding portfolio; now that he is a 90-year-old man, he has compound interest to thank for a little over half of his $101 billion net worth.
Compound Interest Benefits Young Investors the Most
The maxim of never being too old to learn or invest certainly applies to compound interest, but the numerical reality tells you that it is always better to start investing in your younger years, just like Buffett did many decades ago. Granted, not all children will have the precocious advantage of understanding stock trading at the age of 11, but you can help them learn about compounding through a couple of special accounts designed to get kids interested in the crucial topic of personal finance. Parents who reside in the United States can take advantage of these custodial accounts, which are regulated under the provisions of the Uniform Transfers to Minors Act.
Custodial accounts are defined by their vesting. In the United States, children under the age of 18 are only allowed to open savings, checking, or investing accounts if their vesting includes parents or legal guardians as individuals who can open, access, manage, and control the accounts; this provision remains in effect until the principal turns 18, at which point the custodians are no longer named in the vesting, and they are statutorily removed as account holders.
The custodial accounts listed below are ideal for parents who want their children to embark on a financial journey similar to the one taken by Warren Buffett in his adolescent years. Believe it or not, the majority of custodial accounts offered by American banks do not feature compound interest, but the ones discussed herein do:
Invest Early Ally Bank Online Savings
This financial institution rose from the ashes of GMAC, a bank that spectacularly failed at the height of the financial crisis in 2008. With an annual percentage yield of 0.50%, this Ally Bank product is one of the most attractive compound interest savings accounts with custodial vesting.
This online savings account offers more than just daily compounding; it also provides features you can use to segment money into buckets that can represent specific financial goals. To round things out, Ally Bank does not charge any fees for this account as long as you complete your transactions online.
Start Investing with Fidelity® Youth Account
According to many personal financial planners, 13 is a good age to get your children started with investing, which is why Fidelity recently rolled out its new Youth Account for existing clients. When compared to the aforementioned Ally Bank Online Savings Account, this Fidelity custodial product gives children between the ages of 13 and 17 an excellent introduction to the world of investing.
Young investors can do everything from trading stocks to building a portfolio of exchange-traded funds when their parents sign them up for a Fidelity Youth Account. As custodians, parents have full oversight of these accounts, but their children get a more hands-on experience with regard to investing and financial planning. Youth Account holders are not subject to brokerage fees, and they can choose to hold all funds outside of their portfolios in a compound interest savings account. By default, parents get notifications of any Youth Account activity, and they can adjust account settings for the purpose of signing off on transactions.
Introducing children to compound interest and investing at an early age can greatly increase their earnings potential as well as their financial acumen. Getting started is as simple as opening a custodial account with compounding features.