How to Invest for a Newborn Child's Future
Newborns may be a bundle of joy, but they can also cost parents a bundle of money.
According to statistics, it’ll cost mothers and fathers over $230,000 -- more than a quarter million dollars. That’s an average of up to $14,000 per year, from birth to age 17.
Those are just for basic necessities like food, clothing and a roof over their heads.
Factor in other costs, like years of Christmas presents, childcare costs, family vacations, future college tuitions, or helping out with transportation costs.
So, when thinking about how to save money for those different major costs and expenses in the years to come, it’s never too early to start. Here’s how to start saving for baby’s future today:
A 529 plan (named for its Internal Revenue Service code) is a special, tax-advantaged account designed to help save for, and offset, eligible costs associated with your child’s college career, including tuition, room and board, school supplies, and more.
There are two types of 529 plans:
- prepaid tuition plans
- savings plans
Prepaid plans allow you to lock into tuition prices at qualifying colleges and universities years ahead of time, where you can purchase credits that count towards the costs of your child attending school.
However, 529 savings plans might be your better option, where you can invest your money down any number of avenues and earn compound interest along the way.
The best part is that you can start now, and when it’s time for your child to hit those collegiate books, you’ll have 16 or 17 years of dividends matured in your 529 plan to withdraw and use.
As long as they’re used for college expenses, 529 funds aren’t subject to federal tax, and in many cases, state taxes, too.
Luckily, you have a few options for choosing a 529 plan.
One option is to consult a financial advisor or broker to connect you with the right plan based on your child’s future educational needs, and your current and projected budget. (Remember that advisors may levy fees for their services.)
Another option is to research and find a 529 plan yourself, and you may need to look no further than one offered by your state.
This could come built in with special benefits, like matching contributions (similar to a 401(k)), or financial aid assistance and tax deductions.
Determine how much you’re able to save today, and modify your investments as time goes on.
It’s an uncomfortable thing to think about, but you need to take it into consideration: In the event of your untimely death, how would your family and dependants survive without you, especially when and where young children are involved?
Life insurance ensures that they aren’t left without a financial buffer.
The same way you buy health insurance to pay for medical treatment and care, a life insurance policy provides you, the custodian, coverage, and guarantees your beneficiaries a monetary payout -- known as a death benefit -- if you were to pass away.
Life insurance policy payouts can aid your family in paying for everything from funeral expenses, outstanding loans (like a mortgage, to prevent them becoming displaced), or for income to live on.
How much your policy will insure you for can depend on a number of factors, like your age, family medical history, your lifestyle, plus other considerations.
With life insurance, there are two common policies: Term life insurance, a temporary type of policy covering you up to a certain amount of years (usually for about three decades), and whole insurance, with lifetime coverage.
To find the right policy, consult insurance agencies and shop around -- never settle for the first policy you find.
Factor premiums into your budget; like most insurance policies, cheap coverage may not be enough, but you also don’t want to buy more insurance than you need.
Once you obtain a policy, revisit it as your needs change, and always be on the lookout for better coverage and rates.
The concept of a trust fund tends to carry connotations that they’re meant only for the wealthy or high earning, but in reality, anyone can tap into a trust to better provide for their family.
A trust is essentially a type of estate planning, a legally binding agreement that guarantees your property, assets, or other items of value you select are passed onto your beneficiaries with certain built-in advantages, without the complications of certain estate taxes, or the ability to bypass probate.
Nominating your dependents as beneficiaries of a trust enables them to receive the assets your designate in your trust (customarily called trust property) without any legal or financial complications.
And like a solid life insurance policy, this means that they stay on track financially, into the far future, if you were no longer living to provide for them.
Choose your trust carefully if you’re new to estate planning.
You might choose a living trust, which can ensure your trust property is managed while the trustor (you) is living or dead. Other trusts, like testamentary or irrevocable trusts, offer certain protections.
Determine what you’d like to set up a trust for. Is it for reserving a monetary inheritance to your children? Passing along property or other assets to them?
Consult with a financial advisor and map these goals out to reveal which type of trust is right for you.
Welcoming a newborn baby into the family allows parents time to build substantial savings for their young son or daughter as they grow up.
But a normal savings account generally won’t do the job; with low interest rates and fluctuating market conditions, you’d be lucky to save just a couple of thousand dollars over the first decade of their lives, if that.
Your time and money may be better suited to invest in a different type of savings -- bonds.
Savings bonds are backed by the U.S. Treasury, used to fund various capital projects and other borrowing and lending needs of the government. In short, when you invest in a bond, you’re giving the government a loan with your money.
This is a lucrative deal, however, since bonds, over time, pay higher interest rates than you’d find in that conventional savings account -- especially if you invest in something like a Series EE bond, just one type of savings bond that’s promised to appreciate and double in value after 20 years, a sound financial investment.
Bonds have a minimum purchase amount of $25 up to $10,000, which pay interest only after the depositor withdraws their funds, one reason to keep your money locked away to mature and compound dividends.
After 30 years, bonds cease earning interest and are subject to federal taxes, but not on the state and local levels. Series I bonds pay variable interest rates, and Series EE, fixed rates.
Bonds make great gifts for children; imagine buying one the day yours is born, gifting them with it, with a maturation date to cash out on their 18th birthday.
Both have grown so much during that time, making it the perfect time to prepare them with a financial gift for their adult world ahead.
Buying bonds is simple.
Just log onto TreasuryDirect.gov, open an account, and make your purchase in your desired bond and deposit amount.
When the child is 18 years of age, they can create their own account and have the savings bond transferred to his/her account.
Parents, Don’t Forget About Yourselves
On an airplane, safety protocol dictates that you put on your air mask before helping others around you do the same.
It’s important to tend to your well-being before you can fully tend to others, or nobody is helped.
The same is true for saving money -- how can you adequately prepare for your child’s financial future if you haven’t taken care of your own? Saving for your own financial security comes first before having the freedom and luxury of saving for them.
If you’re on a tight budget, and baby expenses take hold, it can be difficult to save money for anyone.
Work together with your spouse or partner to develop a family budget, and put into practice “paying yourself first”: setting aside a portion of your income, each time you’re paid, into a savings or deposit account before paying any bills.
Paying yourself first ensures that you consistently save money each pay period before spending it on expenses and having little, if nothing, left over to save.
If you’re undisciplined, arrange automatic deposits from your paycheck into your savings account through your employer and bank (if you have direct deposit).
Putting this into practice means having an emergency fund and putting away funds for retirement, savings efforts that make it easier to save for family members once you’ve got the ball rolling, and interest is compounding.
If there’s anything more important than saving money for your children, it’s teaching them good financial literacy as they grow.
Even without money saved for them, children can find their own way even without you giving them financial help since the skills they’ll have learned will turn them into financially responsible adults.
As for saving money, which type of savings plan do you choose?
That depends on you, your income, budget, and family situation, including how many children you have, or plan to have.
There’s no reason to pick just one path, either.
You might find that a life insurance policy, a mixture of bonds, and a 529 plan is the way to proceed or some other mix of savings accounts that might present themselves in years to come.
The best mix? Investing in your children’s future by starting a savings plan, and teaching them how to save: the best gift any parent could give.