10 Tips for Your Child’s Financial Future

10 steps to choose the right account to save for your kid’s college, wedding, and first down payment in the best tax smart way possible.

Do you know what the first question we get from new parents is?

“How do we save for college?”

And we get it. You want to give your children a head start but what is the best way to do it and what should the gift be for? There are so many options and it’s easy to be overwhelmed by questions like…

• Which account should you use?
• How much should you put into it?
• Do you contribute to it monthly or annually?
• Can grandparents add money too?
• Are there a tax benefits?
• What are the penalties or fees?

Before you panic, take a step back. The first question to answer is simple. If you want to save money for your children, chose the most important gift first. Most families can’t write a check (or don’t want to) for everything, so they should choose which gift is most important.

3 common gifts for kids

There are 3 common financial gifts that some parents want to give their children but require saving for in advance: a wedding, first down payment, and college. Some parents instead want to provide a gap year or helping with a first car or giving a seed investment for an entrepreneurial child.

But remember, any financial leg up you give your kids is nice but not necessary. There are plenty of people who started with nothing and had successful lives.

The best gift for kids

Seriously, the very best gift you can give your children is being a present, supportive, and engaged parent. The most valuable thing you can give your kids is quality time. Anything you chose to pay for later is extra. Don’t dismiss these sad examples of how quickly inherited wealth is squandered.

The second-best gift for kids

And before you start saving for your kids, the second-best gift you can give your kids (remember engagement is #1) is you being financially secure. It’s just like an airplane demonstration, put your oxygen mask on first so you can help those around you longer. There are lots of ways to pay for college (grants, scholarships, GI Bill, loans, working, etc.) but there is only one way to pay for your retirement, you saving enough. So make sure your future is on track before you start saving for others futures.

10 Steps to choose the right account

Now, if you are a fortunate parent who can, be present, be on track for retirement and save extra, follow these 10 steps to determine the best account to save for your kids:

1. 1. Prioritize the gifts from most to least important
      • Example: a wedding is #1 and college is #2 and down payment is not something you want to help with.
   2. Determine the total amount of money you want to give your kids
      • Example: I want to give each child $50,000
   3. Use a savings calculator to see how much you need to save each month or year
      • Example: if you want to give your newborn $50,000 at age 20, you need to save $190 a month at 1% interest for 20 years to get to $50,000
   4. Look at your current monthly budget to see if you can afford that
      • Example: if you have $500 a month extra in your budget, you can easily save $190 a month for your child
   5. Multiply that monthly amount by how many children you have or hope to have
      • Example: if you have 4 kids and want to give them each $50,000 at 20, then you would need to save $760 a month at 1% starting the year they are born
      • You want this to be sustainable so it’s best to chose an amount you can easily do for all kids
   6. Choose the best account for the financial gift you want to give
      • For wedding we recommend a custodial account custodial account
      • For down payment we recommend a custodial account or your Roth IRA basis and down payment provision
      • For college we recommend 529 plan or pre-paid college credits depending on the states
      • Here is an article that lists other accounts for kids
   7. Automate the monthly or annual contribution so that you have the best chance of reaching your goal
      • You want to put it on auto-pilot
   8. Choose a low-cost investment fund, platform, or advisor to keep as much of your savings growing as possible
      • The fund is the fuel so look at the internal expenses, fund fee or advisor fee and keep it under 1%
   9. Make sure your investments have the amount of risk you are comfortable with to reach your goal with as few surprises or swings as possible
      • Take risk as your personal comfort level for ups and downs and know that lower the risk the less potential return so you may need to save more to reach the same goal
   10. Review it each year to make sure it is still aligned with your desire and on track
       • Talk with your spouse to make sure you’re on the same page with the goals you’ve prioritized, check the annual investment performance to make sure it’s at or above the return % you chose in the savings calculator and make sure you can continue to fund it with additional children that may come

Making your decision

These 10 steps will help you determine what you want to help with most, how much it will take to accomplish it, which account is best to use for it, how to get the return and manage the risk along the way and how often to check on it.

It’s a privilege to be on track for your financial goals and have extra to help your kids with theirs but remember, the best gift you can give your kids is attention. Any money that comes later is simply a bonus.

Disclaimer : This post is for informational purposes only and is never to be taken as advice or a recommendation. Talk to a tax or legal professional to determine how this information best applies to your personal situation.