When you’re preparing to have a baby, long-term considerations like paying for college tuition seem relatively unimportant compared to more immediate concerns like nursery room furniture, diapers, formula, and childcare facilities.
However, the earlier you begin saving for the future, the better off your child will be.
Investments parents should make
529 College Savings Plan
There are two types of 529 college savings plans, prepaid tuition plans, and savings plans. Prepaid tuition plans apply to one “qualified educational institution” (accredited, 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the earnings on these accounts are not subject to federal taxes, or state taxes, in most cases, so long as the withdrawn money is used for qualified educational expenses, like tuition, textbooks, computers, fees, room, and board.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 then you may be subject to gift taxes on the contributions.
Savings Account
It may seem silly to start a savings account for a newborn, but this is an ideal strategy for building a nest egg for your child’s future. If grandparents or relatives ever send money for your kids’ birthdays, set the money aside in this dedicated savings account. That way, your children will be able to withdraw from it when they’re old enough to make responsible purchasing decisions.
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.
Bonds
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. This can help them to buy their first car, pay for college tuition, or even put a down payment on their first home.
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. This might include a mix of stocks, bonds, and mutual funds.
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. It doesn’t matter if that’s by earning an allowance, diverting some money to their savings account, or just 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. So, don’t miss out on this great avenue for teaching financial literacy skills to your kids while they’re still young.
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. Considering how 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.
A Final Word
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 more important than many parents might think. 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.
What about you? Are there any other investments parents should make that should be added to the list?
I whole heartedly agree about the 529. It doesn’t always feel awesome to pony up the $3,000 to start one, but I can tell you years later it feels amazing to have one.
I like the idea of getting the savings account and enforcing giving and savings habits from a young age. It’s always easier to start sooner.
When was the best time to plant a tree?