Whether you’re a veteran parent or preparing to embark on the parenthood journey for the first time, you’ll want to prepare in the best way possible. From both a parenting perspective and a financial standpoint, saving money for your children is always wise.
While the emotional side of parenting is best left to psychology experts, we are here to help you get your finances in place. Saving money for the short-term and future needs of both you and your children can be overwhelming, but that’s why we’re here. Keep reading to discover the best way to save money for your child and learn when to start saving.
Start saving early
The best ways to save money for your child are by starting early and saving often. It’s no secret that the cost of raising a child is steep. The USDA has been monitoring the growing costs of raising a child since the 1960s. Their latest study was completed in 2017 and it showed that the average cost of a child from a middle-class family costs about $233,610 from birth to the age of 17.
Normal annual expenses run an average of $12,000 per child per year. While this statistic is a baseline, there are thousands of factors that can alter this number. The bottom line is that you’ll want to start saving money for your kids sooner than later.
If you are a new parent, get started by estimating how much you’ll need for your child within the first few years. Consider some of the big purchases, like a crib, stroller, and carseat. Be sure to also account for the costs of adding your baby to your health insurance plan. The average first year of expenses usually amounts to about $13,000.
But annual expenses are just a starting point. When you’ve considered those recurring costs, you can move on and start considering long-term savings goals like college planning. In preparing for the financial future of your children, you’ll also want to consider investment accounts to build long-term wealth.
4 Ways to Save for Your Child
Once you’ve established how much you need to save, the next step is to determine where the funds should go. Consider these options for saving money for kids and to give your child(ren) a good start in life:
1. Investment accounts
Saving money for kids using an automated investment account is a simple way to start planning for the future. You can automate the entire process and let your money work for you without exerting much effort yourself. You can also get your older kids involved and teach them about the power of investing!
A managed investment account from MoneyLion is a great way to get the ball rolling. Simply open a managed investment account at no cost, and the MoneyLion robo-advisor platform will do all the legwork, including investment selection, trading, and rebalancing, all without any management fees.
Plus, you’ll have the option to set up recurring deposits with the auto-invest feature, which makes saving and growing your money even simpler. You can withdraw funds at any time without any hassle.
2. State college savings plans
Here is how it works: Individual states have prepaid tuition plans that lock in the current tuition rates at public institutions. Considering that college costs go up by 3% to 4% each year, this is a smart move. This is also a significant benefit considering the impact that inflation has on tuition rates.
If your child decides to attend a private or out-of-state institution instead of the state’s public university, the plan will still make partial payments to the school on their behalf.
In most instances, your child must be 15 years of age or younger to qualify for the plan, and there is a three-year waiting period to access the funds. If they decide not to use the plan, look into either transferring the funds to another qualified family member or requesting a refund.
Florida, Maryland, Massachusetts, Mississippi, and Washington State have guaranteed prepaid tuition plans. This means these states back the plan and guarantee it will perform as promised. Unfortunately, not all states offer prepaid college plans.
Non-guaranteed plans are offered in Illinois, Michigan, Nevada, Pennsylvania, and Texas. They are a bit riskier because they can be modified or terminated by the state at any time. Furthermore, these plans may not rise in value as expected.
3. 529 college savings plan
If state college savings plans seem risky or impractical, consider a 529 college savings plan, which is an investment account that makes saving for kids’ higher-education expenses easy. This is an ideal option if your state doesn’t offer a prepaid college tuition option or you want more flexibility. After all, who knows where your two-year-old will want to go to college?
These plans do not require you to contribute a certain amount before you can receive a guaranteed benefit. Instead, you’ll make pre-tax contributions, which lower your taxable income, and name a beneficiary to receive the proceeds. When the time comes, the beneficiary can use the funds to cover qualified expenses like room, board, books, and any other college-related expenses.
Be mindful that withdrawals made for non-qualified expenses will result in state and federal income taxation plus a 10% penalty. You should also consider the risk of loss associated with non-guaranteed investment accounts.
4. Traditional savings accounts
Traditional savings accounts offered by banks and credit unions are another option if you want a safe place to put away money for your child’s future. Keep in mind that they aren’t always highly recommended for this purpose, as they yield lower returns than other savings plans.
With current low-interest rates and rising inflation, your money will lose spending power over time if it’s just sitting in a savings account. It is better to use an investment account and keep only a small portion in savings while gradually moving more and more into savings as your child approaches college.
Saving for Kids
Saving for your child’s future is a wise money move. It’s even more powerful when you teach them to start saving from a young age. By helping them develop habits that improve their financial responsibility, they can start planning for the future while learning about the power of investment and savings.
If your child is disciplined enough not to touch what you’ve saved for them, they’ll have a nice stash of money when it’s time to go to college. Let’s look at a few easy ways you can teach your child how to save money!
Save a portion of gifts
Some families like to teach responsibility by suggesting that a percentage of each monetary gift gets allocated to savings, making it a habit over time. As your little ones grow older, they may receive monetary gifts from friends or relatives on birthdays, holidays, and special occasions. Encourage them to sock away a portion before doling out any cash on the latest toys, electronic gadgets, or whatever else their little heart desires.
Stow away portion of income
The time will come when your child lands their first job. It could be something as simple as babysitting the neighbor’s children for a few hours or mowing lawns. Or maybe they’ll wait until they’re 16 to start working part-time consistently. Either way, you should sit down with them to establish a savings plan before they earn their first dollar. By this time, they should be old enough to understand the importance of saving for the future.
Map out a financial plan on paper or use a spreadsheet. Demonstrate how savings and investment will grow at different rates of return over different periods of time. One fun way to do this is to help your kids calculate how long it will take to earn their first $1 million at different interest rates. This is an effective way to demonstrate how their efforts will pay off over time, and it can also serve as a source of motivation to be intentional about saving.
A little effort will bring long-term rewards
The best way to save money for your child is to start early, stay consistent, and keep learning. If you ever feel confused or unsure, you can give a Moneylion managed investment account a try. It features automated investing, which makes stacking cash for your little one a breeze.
You can start with just a few dollars as there are no minimums, and you won’t be hit with steep investment fees. Best of all, MoneyLion investment accounts are fully managed so you can watch your money grow while focusing on all of the other important facets of your busy life.
If you’re not ready to jump into investing, start depositing savings into a personal bank account where you will have easy access in case of life’s unexpected events. Whatever type of account you choose, planning for the future means taking financial responsibility so that your child’s needs are covered no matter which life path they choose.