The Custodial Account Trap
In my time at Westminster Wealth Management, I have sat across the table from countless parents who share a singular, unified anxiety: they want their children to launch into adulthood successfully. We often try to solve this anxiety with financial products. We open 529 plans for college, we look at UTMA accounts for future down payments, and we trust that compound interest will do the heavy lifting of parenting.
However, a recent conversation on The Dave Ramsey Show highlighted a critical distinction between funding a child’s future and preparing a child for it. The caller, Chris from South Carolina, found himself in a situation that is likely familiar to many of you. He was tired of his children, aged seven and nine, constantly asking to withdraw money from their savings accounts for impulsive purchases. His solution was to move the money into a custodial brokerage account—not necessarily for the investment returns, but to create a barrier. He wanted the money to be "harder to get" so the nagging would stop.
Dave Ramsey and his daughter, Rachel Cruze, immediately identified this for what it was: a behavioral issue masquerading as a financial strategy. They argued that moving money to a less accessible account is just an avoidance tactic. It does not teach the child why they shouldn't spend; it simply prevents them from doing so.
As a financial planner who looks at the entire lifecycle of wealth, I found their breakdown of the solution fascinating. They moved the conversation away from "accounts" and "yields" and toward four behavioral pillars: Work, Give, Save, and Spend.
Here is my take on why these four principles from Dave Ramsey—and the specific "Financial Peace Junior" method they advocate—are actually more valuable than any stock portfolio you could build for a nine-year-old.
Principle 1: Work (Commission vs. Allowance)
The first mindset shift Ramsey advocates is changing the terminology of household income. In many homes, children receive an "allowance." The implication of an allowance is that money is provided simply because the child exists. While we certainly want our children to feel secure, financial markets do not pay us for existing. They pay us for value creation.
Ramsey suggests replacing "allowance" with "commission." The rule is binary and absolute: You work, you get paid; you do not work, you do not get paid.
From a planning perspective, I cannot endorse this enough. The most dangerous financial trait in a young adult is a disconnect between effort and income. When a child learns at age seven that money is a direct result of labor—sweeping the floor, feeding the dog, taking out the trash—they begin to view money not as a magical resource dispensed by parents, but as a stored form of their own energy.
This does not mean we treat our children like employees. It means we respect them enough to teach them how the economy actually functions. If they choose not to do the chore, they are not "in trouble." They simply do not have money. That is a far more powerful lesson than any lecture.
Principle 2: Give (The Antidote to Selfishness)
The second envelope in the Ramsey system is "Give." Before any spending happens, and even before saving, a portion of the commission is set aside for generosity.
You might ask, why prioritize giving for a child who barely has ten dollars to their name? The answer lies in character development. Financial planning is not just about accumulation; it is about stewardship. We see this with our high-net-worth clients constantly—those who have a practice of philanthropy often have a healthier relationship with their wealth than those who do not.
Teaching a child to give breaks the natural human tendency toward selfishness. It forces them to look outward and recognize the needs of others. Whether they are putting a dollar in the collection plate at church or buying a toy for a donation drive, the act of parting with their own "earned" money for the benefit of someone else establishes a muscle memory of generosity.
Ramsey and Cruze note that this should be the first envelope. If we teach children to pay themselves first (saving) and others second (giving), spending naturally becomes the remainder, rather than the primary event.
Principle 3: Save (Visualizing the Future)
For adults, saving is often an abstract concept involving digital transfers and 401(k) balances we check quarterly. For a seven-year-old, Ramsey and Cruze argue that abstraction is the enemy.
This is why they advised Chris to keep the money in cash at home, rather than in a bank account. When a child puts a five-dollar bill into a clear jar or an envelope marked "Save," they see the progress visually. They see the pile grow.
This addresses the "impulse control" issue Chris was struggling with. When money is invisible (in a bank), it feels infinite to a child. When it is physical, it is finite. If the goal is a new bicycle or a video game console, the child can physically measure their distance from that goal.
In my practice, I often discuss "time horizons" with clients. For a child, the time horizon is usually next week or next month. By using a physical savings system, we are training the child to tolerate a time horizon longer than "right now." We are building the discipline required for long-term investing later in life. If they cannot save for a Lego set at age nine, they will struggle to save for a down payment at age twenty-nine.
Principle 4: Spend (The Dignity of Choice)
The final envelope is "Spend." This is where the rubber meets the road for the parent. This is where you have to let them make mistakes.
Ramsey’s advice to the father in South Carolina was poignant: stop trying to prevent the mistake and start letting the system handle the "no." If the child wants a cheap plastic toy that will break in five minutes, and they have the money in their Spend envelope, you should let them buy it.
Why? Because the regret they feel when the toy breaks—or when they realize they no longer have money for something better—is a low-stakes lesson. It costs five dollars to learn that lesson at age seven. It costs thousands of dollars to learn that lesson with a credit card at age twenty-two.
Conversely, if the Spend envelope is empty, the answer is no. Not because you are a mean parent, but because the math says no. This removes the emotion from the transaction. It teaches the child that scarcity is real.
Rachel Cruze shared a story about her daughter earning six dollars to buy a Polly Pocket. When she finally bought it, she told everyone, "I bought this." There is a distinct pride that comes from ownership. When we simply hand children things, we rob them of that dignity. The spending power is meaningful only because the earning effort preceded it.
Conclusion: Education Over Protection
The instinct to open a custodial brokerage account was born from a desire to protect the money. But the Ramsey advice flips the script: do not protect the money; educate the child.
If we focus solely on the mechanics of accounts—UTMAs, 529s, Roth IRAs—without addressing the behavioral foundation, we are building a house on sand. The four pillars of Work, Give, Save, and Spend provide a structural integrity to a child’s financial personality.
At Westminster Wealth Management, we believe that wealth is a tool to support a life well-lived. Part of living well is raising children who are not just beneficiaries of wealth, but competent stewards of it. Whether you use three envelopes, a clear jar, or a spreadsheet, the method matters less than the principle: connect money to work, and give them the freedom to fail while the stakes are small.
Disclaimer: This blog post is for informational and educational purposes only and does not constitute legal, tax, or investment advice. Consult with qualified professionals for advice specific to your situation. Kevin Lynch Sr. and Westminster Wealth Management are not attorneys or tax advisors.