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Everybody knows that raising a kid is not cheap. From diapers to formula, field trips to new coats, and first cars to prom dresses, you want your kid to have nothing but the best. And then there is the whole issue of paying for college and tuition! This is why it’s essential to set up a well-thought-out savings plan for kids in your family.
Yes, there are scholarships and help from family (if you are lucky), but tuition fees are still on the rise and unexpected costs pop up around every corner. But I don’t want you to panic! All you need to do is take some time now and your child will benefit immensely in the future. Let’s get started!
Savings Plan For Kids: Step-By-Step Guide
Step 1: Save right away.
The earlier you start, the better. It’s just the same as retirement. So often, people see retirement as a milestone eons into the future. But as you get older, it creeps up on you and you find yourself way behind your savings goal. You don’t know you need it until it’s too late!
Don’t let this be yours or your child’s saving plans. Yes, things are expensive when children are young. You’re still budding in your own career and things get stretched tighter than they were pre-child. But just by tucking a little bit away right from the beginning, it keeps it front of mind and a part of your financial plan from the get-go.
Step 2: Figure out what you can afford.
While it may be ideal to pile away tons of money for your child’s future, don’t forget about your other financial responsibilities. Your financial security should never be given up in order to make a saving plan for kids.
Map out all of your financial long-term goals. This can be anything from saving for a down payment to paying for a new washer and dryer. You still want to make sure you’re contributing to all of your goals.
In order to have a good financial plan, make sure you are still saving for retirement. Even if your child heading off to college seems much closer, you don’t want to be stuck hustling when you should be retiring. Another financial must-have is an emergency fund to pay for any kind of unexpected payments, such as medical fees or housing damage.
You also want to ensure you’re still living comfortably. Saving for your child’s future means you should still save for their present. Make sure you fit in your child’s needs now and keep your own physical and mental health top of mind as well.
Other easy ways to save include automating your contributions. This way, it’s like money you never knew you had that goes straight to savings. You can also ask family for donations to your savings plan for Christmas and birthdays, especially if they already have toys galore.
The amount that people can afford in terms of saving will be different for everyone – the important thing is that you are saving.
Step 3: Invest as part of your savings plan for kids.
The good news is, you’re not alone when it comes to saving! There are plenty of ways you can save and earn interest to grow your child’s nest egg.
Everybody knows about trusty savings accounts. Investing in a savings account from a bank is one of the safest methods to store away money, but you do earn interest very slowly. It’s important to remember that anything you earn will also be considered taxable income.
Another option is to open a high-yield savings account – they pay double or triple the amount of interest as a regular savings account. However, the amount is still low relative to the other options below. Remember, low risk means a low return. But this is also where some people feel the most comfortable!
One of the most popular options for saving, a 529 plan is designed with college tuition in mind. You can contribute to this plan whenever you like, saving money whenever it’s available. You can contribute in many different ways, such as mutual funds or ETFs.
People love these accounts because you can withdraw from them tax-free. However, it must be for educational purposes. This could include tuition, books, rent while in college, and more. The money only works for U.S. accredited schools, the exception being some international options.
The account belongs to an owner (parent or guardian) and the beneficiary is the child/future student. The fees and the contribution limits will vary significantly depending on what state you live in. But no matter where you are, it’s a good investment option.
The account can also be used for elementary and secondary school, so it doesn’t just have to be for a college education. Another option includes enrolling in a 529 prepaid tuitions plan. This is a more low-risk option as you don’t choose a specific investment option. But you risk not getting total value if the school doesn’t accept this type of payment.
Another method for a savings plan for kids is a UGMA (Uniform Gift to Minors Act) or a UTMA (Uniform Transfer to Minors Act). The best part about these accounts is that you can save them for non-educational purposes, so you don’t have to worry if college is not something your child is interested in.
Through these accounts, you can register your kids for investments in most states. You can also use the account to make withdrawals to cover the expenses of your child. If you want to take out a chunk of cash to send them away on the school’s outdoor school trip, you can certainly use their UGMA account!
Once the child is of age, parents no longer have control over the money. However, there are no limits to contributions, and you can withdrawal funds at your child’s income tax rate to reduce taxes.
Roth IRA (Individual Retirement Account) and children may not seem like a match at first, but they’re actually a very useful tool to use for a savings plan for kids. While you can’t make an account for kids or toddlers, you can create one for your child who is of working age.
This is an excellent way to teach your child how to start saving. If they make any contributions, you can take them out without being penalized (but you cannot take out the earnings). For teenagers with part-time jobs, they can make their own contributions to their account. Parents may also contribute to the account as long as it doesn’t go past the annual limit ($6000 at this time).
Step 5: Make sure it’s flexible.
Never toss all your eggs in one basket. Even if you saved up enough for your child’s college tuition, they may not actually end up going to university. If you saved solely in a 529 plan, you couldn’t spend that money for other reasons without being penalized 10% on the earnings.
This is why it’s always a good idea to diversify your earnings. This also goes for varying levels of risk. You may want a safe investment option for security as well as a riskier option that could grow more.
Step 5: Prepare for the unexpected.
We all hate to think about it, but emergencies and the unexpected do occur. There are a couple of insurance options you may want to consider in order to secure your child’s financial future. First and foremost, you will want to consider getting life insurance.
Having a life insurance policy acts as a safety net in case the worst happens and a parent passes away. The amount received ensures the kids don’t have to worry about their financial future and a spouse doesn’t stress about the loss of an income stream. It works as a contract that pays a beneficiary (or two) after the payment holder passes away.
Life insurance costs less the younger you are, so the sooner you can lock in a price the better. It is best to insure both parents. Many workplaces offer life insurance, but only while employed.
The other insurance you may want to consider is critical illness insurance. This will pay for expenses if a member of the family became seriously ill. This will help not only cover expenses but the loss of income. Keep in mind, not all illnesses are covered.
Savings Plan For Kids: Now What?
By now, you should have the stepping stones all laid out for you on how to prepare for the future. It doesn’t matter what your child’s future will look like, college or traveling the world. It doesn’t matter how much money you can afford to save now. What matters is that you’re thinking about what comes next and keeping your child top of mind!