Whether you’re a new parent or preparing to embark on the parenthood journey, you want to be ready in the best way possible from both a parenting and financial standpoint.
Parenting is more than parenting classes and baby showers, of course. You also need a child savings plan to ensure you have enough cash on hand for your child’s short-term and future needs.
When should you start saving money for your child, and what are the most effective child savings plan methods? Read on to learn the answers to these important questions and more.
It’s no secret. 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 completed in 2017 showed that a child from a middle income family will cost $233,610 from birth to age 17. While this statistic is a baseline, there are 1,000’s of factors that can sway this number. The bottom line is that you want to start saving money for your kids sooner than later.
To get started, estimate how much you’ll need in the first few years. There will be some big purchases like a crib, stroller, and carseat, but you should also account for adding your baby to your health insurance. This total figure can serve as a starting point or a short-term savings goal. It’s estimated that a baby costs anywhere from $21,000 to $52,000 in the first year, to give you some perspective.
When you’ve considered that amount, you can move on to consider long-term savings goals, like college planning.
Where 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 to save money and give your child a good start in life:
Add To an Investment Account
Investment accounts make it easy to save for your child’s future. If you’re always on the go, you can automate the entire process and allow your money to work harder for you without exerting much effort.
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. Plus, you have the option to set up recurring deposits with Auto Invest, which makes saving and growing your money super easy. If you can withdraw funds at any time without all the hassle.
Your State’s College Savings Plan
With the rising cost of tuition, the thought of saving for college can be daunting. But your state’s prepaid tuition plan can help calm your fears. They simplify college planning with a straight-forward savings plan by locking in current tuition rates at public institutions. Considering that college costs go up by 3 to 4% each year, this could be 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 a plan, and there is a 3-year waiting period to access the funds. If they decide not to use the plan, it may be transferable to another qualified family member or you can request a refund.
Unfortunately, not all states offered prepaid college plans. Florida, Maryland, Massachusetts, Mississippi, and Washington have guaranteed prepaid tuition plans. This means the states backs the plan and guarantees it will perform as promised.
Non-guaranteed plans are offered in Illinois, Michigan, Nevada, Pennsylvania, and Texas. They are a bit riskier and can be modified or terminated by the state at any time. Furthermore, these plans may not rise in value as anticipated.
Consider a 529 college savings plan, which is an investment account that makes saving for higher-education expenses easy. It is an ideal option if your state doesn’t offer a prepaid college tuition option or you want more flexibility.
These plans do not require you to pay in a certain amount to receive a guaranteed benefit. Instead, you make pre-tax contributions, which lowers 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 percent penalty. You should also consider the risk of loss that’s associated with non-guaranteed investment accounts.
Traditional savings accounts offered by banks and credit unions are another option if you want a safe place to park 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.
However, they are the most liquid of all the options and easily accessible should a major financial emergency arise.
Teaching Your Children
Saving for your child’s future is a wise money move. Teaching them to start saving at a young age is even better, as they’ll begin developing sound financial habits that can serve them well in the real world.
If your child is disciplined enough not to touch what’s saved, they’ll have a nice stash when it’s time to go away for college.
A few easy ways you can teach your child to save money:
Save a Portion of Gifts
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 toy, electronic gadget, or whatever else their little heart desires.
Save a 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 little ones 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.
Map out the map on paper or by using a spreadsheet. This is an effective way to demonstrate how their efforts will pay off over time, and can also serve as a source of motivation to get intentional about saving.
Choose the Right Way to Save Money for Your Child
Figured out how to save money for your kids but are still on the fence about where it should go? Give the 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 the other important facets of your busy life.