When you’re preparing to have a baby, long-term considerations like paying for college tuition seem relatively unimportant compared to more immediate concerns. Instead, you’re likely thinking about nursery room furniture, diapers, formula, and childcare.
However, the earlier you begin saving for the future, the better off your child will be in their teens and twenties. Here are investments new parents should make…
Top 4 Investments New Parent Should Make
529 College Savings Plan
There are two types of 529 plans, prepaid tuition plans and savings plans. Prepaid tuition plans apply to one “qualified educational institution,” like accredited or nonprofit universities. Savings plans are typically applied to any college your child wishes to attend.
Each state has its own 529 college plan, though the benefits of these savings plans are relatively similar. Although contributions to the 529 plans are not tax deductible, the earnings on these accounts are not subject to federal taxes or state taxes, in most cases, so long as the withdrawn money is used for qualified educational expenses. These include tuition, textbooks, computers, fees, room, and board.
There are few restrictions when it comes to setting up a 529 college plan. There are no income limits, and anyone can be named the beneficiary. But, you cannot contribute more money than what your child will eventually spend on qualified educational expenses. If you contribute more than this amount (the IRS lists $14,000 per year as the general guideline), then you may be subject to gift taxes on the contributions.
It may seem silly to start a savings account for a newborn or toddler, but this is an ideal strategy for building a small nest egg for your children’s futures. If grandparents or relatives ever send money for your kids’ birthdays, you can set the money aside in this dedicated savings account.
As your children start earning allowances or make money through babysitting, lawn mowing, and tutoring gigs, encourage them to put at least 20% of their income into their savings accounts. That way they can afford bigger purchases like a car or phone later on in their teenage years.
Buying bonds for your children to cash out in a decade or two is a great way to give them a head start in life. Investing in bonds may seem like a conservative strategy, but it’s an excellent way to guarantee consistent returns as your children grow up.
Alternatively, you could set up a guardian investment account for your kids, which might include a mix of stocks, bonds, and mutual funds that will appreciate in value as your children grow older.
Personal Finance Knowledge
This isn’t a monetary investment as much as a long-term investment in your child’s ability to manage their own finances in the future. Children as young as kindergarteners can start learning about the basics of financial management by earning an allowance, diverting some money to their savings account, and learning the fundamentals of budgeting.
The BusyKid app was developed just for parents who want to teach their kids about making money, budgeting, saving, and even investing!
Financial literacy is enormously important for parents to teach their kids because most U.S. schools are failing to teach students about budgeting, saving, and credit management. Many young adults presently have five-figure student loan debts and thousands of dollars in credit card debt on average. You can give your children a huge advantage over their peers by reinforcing the benefits of smart financial management at home.
Having kids is an expensive, life-changing experience. While the emotional joys of parenting likely outweigh any financial concerns, it’s still important to take time to plan out your children’s financial futures.
Teaching your kids about money management is also more important than many parents might think because schools simply aren’t teaching our kids about money, which means it’s up to parents to fill in the educational gaps for crucial life skills like personal finance.
By starting early with a 529 plan, savings account, interest-accruing bonds, and financial literacy education, your kids will be much better prepared to independently navigate their own financial situations when they leave home as adults.