$700 guaranteed to not be touched for 15 years+, should I put it anywhere other than a savings account?

Question

My daughter's piggy-bank was recently broken, and so we took the opportunity to count up the money saved, and put it away. We have an on-going account that we put money into every paycheck through an online savings account. Originally, we'd planned on just putting this $700 into their fund which we're not planning on touching for another 15 years or so (around the time she turns 21).

In the grand scheme of things, $700 isn't a lot of money. Are there any long-term savings / high % return options I should even bother looking into here?

Answer 1

(Since you used the dollar sign without any qualification, I assume you're in the United States and talking about US dollars.)

You have a few options here. I won't make a specific recommendation, but will present some options and hopefully useful information. Here's the short story:

• You don't want to start buying individual stocks with that amount of money.
• There are several reasonable mutual funds available with the amount of money you're talking about.
• Treasury savings bonds are an option. They are convenient and come with guarantees, and the government planned them for exactly this purpose. However, the rates are quite low.
• You can leave it in a savings account. This is convenient, but you probably won't keep up with inflation.
• You can buy certificates of deposit (CDs) from a bank.

Individual stocks

To buy individual stocks, you need to go through a broker. These brokers charge a fee for every transaction, usually in the neighborhood of $7. Since you probably won't want to just buy and hold a single stock for 15 years, the fees are probably unreasonable for you.

If you want the educational experience of picking stocks and managing a portfolio, I suggest not using real money.

Mutual funds

Most mutual funds have minimum investments on the order of a few thousand dollars. If you shop around, there are mutual funds that may work for you. In general, look for a fund that:

• has a suitably low minimal investment,
• allows you to make a custodial account for your daughter,
• has a low expense ratio (much less than 1%),
• doesn't have transaction fees (sometimes called "load"), and
• subject to taste, tracks an index (such as the S&P500) and doesn't try to be too fancy.

An example of a fund that meets these requirements is SWPPX from Charles Schwabb, which tracks the S&P 500. Buy the product directly from the mutual fund company: if you go through a broker or financial manager they'll try to rip you off.

The main advantage of such a mutual fund is that it will probably make your daughter significantly more money over the next 15 years than the safer options. The tradeoff is that you have to be prepared to accept the volatility of the stock market and the possibility that your daughter might lose money.

Treasury Bonds

Your daughter can buy savings bonds through the US Treasury's TreasuryDirect website. There are two relevant varieties:

• Series EE bonds, which do not specifically track inflation.
• Series I bonds, which do specifically track inflation.

You and your daughter seem to be the intended customers of these products: they are available in low denominations and they guarantee a rate for up to 30 years. The Series I bonds are the only product I know of that's guaranteed to keep pace with inflation until redeemed at an unknown time many years in the future.

It is probably not a big concern for your daughter in these amounts, but the interest on these bonds is exempt from state taxes in all cases, and is exempt from Federal taxes if you use them for education expenses.

The main weakness of these bonds is probably that they're too safe. You can get better returns by taking some risk, and some risk is probably acceptable in your situation.

Savings Accounts

Savings accounts, including so-called "money market accounts" from banks are a possibility. They are very convenient, but you might have to shop around for one that:

• offers custodial accounts or accounts for minors and
• doesn't charge fees or unreasonably reduce the interest rate for the amount of money you're talking about.

I don't have any particular insight into whether these are likely to outperform or be outperformed by treasury bonds. Remember, however, that the interest rates are not guaranteed over the long run, and that money lost to inflation is significant over 15 years.

Certificates of Deposit (CDs)

Certificates of deposit are what a bank wants you to do in your situation: you hand your money to the bank, and they guarantee a rate for some number of months or years. You pay a penalty if you want the money sooner. The longest terms I've typically seen are 5 years, but there may be longer terms available if you shop around.

You can probably get better rates on CDs than you can through a savings account. The rates are not guaranteed in the long run, since the terms won't last 15 years and you'll have to get new CDs as your old ones mature. Again, I don't have any particular insight on whether these are likely to keep up with inflation or how performance will compare to treasury bonds.

Watch out for the same things that affect savings accounts, in particular fees and reduced rates for balances of your size.

Answer 2

If you plan on holding the money for 15 years, until your daughter turns 21, then advanced algebra tells me she is 6 years old. I think the real question is, what do you intend for your daughter to get out of this?

If you want her to get a real return on her money, Mike Haskel has laid out the information to get you started deciding on that. But at 6, is part of the goal also teaching her about financial stewardship, principles of saving, etc.? If so, consider the following:

When the money was physically held in the piggy bank, your daughter had theoretical control over it. She was exercising restraint, for delayed gratification (even if she did not really understand that yet, and even if she really didn't understand money / didn't know what she would do with it). By taking this money and putting it away for her, you are taking her out of the decision making - unless you plan on giving her access to the account, letting her decide when to take it out.

Still, you could talk her through what you're doing, and ask her how she feels about it. But perhaps she is too young to understand what committing the money away until 21 really means. And if, for example, she wants to buy a bike when she is 10, do you want her to see the fruits of her saved money?

Finally, consider that if you (or you & your daughter, depending on whether you want her to help in the decision) decide to put the money in a financial institution in some manner, the risk you are taking on may need to be part of the lesson for her. If you want to teach the general principles of saving, then putting it in bonds/CD's/Savings etc., may be sufficient, even if inflation lowers the value of the money. If you want to teach principles of investing, then perhaps consider waiting until she can understand why you are doing that. To a kid, I think the principles of saving & delayed gratification can be taught, but the principles of assuming risk for greater reward, is a bit more complex.

Answer 3

Well, I understand this forum is about money but I think you would be far better off if you invest the money in your daughters education or something similar that can bring much more significant future gains.

I am a big fan of compound interest and investing in stocks but $700 sitting until she's 21 wont grow into a significant amount.

When she's 21, what would you "hope" she'd spend the money on? something valuable like education right? so why don't you take the first step now so she will get a much bigger return than the monitory value.

If I were you I'd invest in a home library or something similar.