Life Planning 101: Financial Planning for Your Children’s Future
Planning for future expenses incurred by your children is one of the most important aspects to financial life planning. Whether it’s college, weddings, travel, or health, children get more and more expensive as they age. You even need to plan to set them up after you’ve passed on, so there is a whole lot of planning involved.
You need to start putting aside money for college ASAP
If you delay on putting aside money for your kids’ college, you’ll regret it down the line. The earlier you start investing money, the less you have to invest in order to hit your target amount.
There are types of investment accounts dedicated to college funding, the most popular of which are 529 plans. These state-sponsored plans, offered in all 50 states, can use a combination of “stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age,” according to the SEC.
These are different from prepaid tuition plans which allow parents to pay their kids’ tuition, room, and board at locked-in rates.
These college-specific plans are only the tip of the iceberg when it comes to way to invest for your children’s college.
It’s not just about college
College is far from the only major expense you want to save for when it comes to your kids. Think about all the life events you may want to help pay for – weddings, school trips, travel, sports and music classes, etc. Sometimes you just want to save money for your children – money that can be used for whatever pops up in life.
One smart way to do this is with brokerage accounts. Schwab breaks down the primary types:
- Custodial brokerage account—This is a brokerage account managed by a parent or guardian on a child’s behalf. It offers minor tax advantages and has minimal restrictions on how the money can be spent as long as it’s for the benefit of the child beyond daily living expenses. Unlike a 529, there are no recommended investment portfolios. You can choose from a wide variety of investments—stocks, bonds, mutual funds—according to your feelings about risk. A key difference is that the child takes control of the money at the “age of majority,” which is 18, 21 or 25 depending on state rules. That’s something to think about.
- Regular brokerage account—This is a taxable account that you could open in your own name and earmark the savings and investments for your daughter. You’d then have the control and freedom to use the money as you see fit.
- Passbook savings account—This could be for short-term savings needs. It’s also an account your child could contribute to, as they get older.
These brokerage accounts offer flexibility – the money can be used for college expenses or really anything else, once you child hits a certain age. It’s money for your child’s future, with few strings attached.
Safe but low return
Sometimes you want to start investing in the future but you don’t want to carry a lot of risk. Traditional savings accounts, bank CDs, and US savings bonds all offer safety, but with the drawback of fairly low returns – at least comparably. If you want your child to learn about basic investment while making an actual low-risk investment, these may be the best paths for you.
It’s important to figure out your investment priorities and cover those bases first. If you know you want to cover or at least help pay for your children’s college, it’s vital to set up a specific college savings fund as soon as you can. Once that’s in place, you can move on to other types of saving. It may come down to selling your home and downsizing to something that’s not as valuable, so you can free up some money that way.
Either way, time is money – and even a little bit invested now beats waiting to invest more.