Disclosure: This post is sponsored by E. Francis Financial.
Getting Started on the Path to Saving for Your Child’s Future
When it comes to setting aside money for your child’s future, trying to swim through the vast sea of options at your disposal can seem quite overwhelming. To help you avoid the analysis paralysis so many parents encounter, here are just a few considerations to get you started.
Don’t Forget About You…
As you begin to formulate a plan, be sure to not overlook the importance of saving for your own future. Unless you believe your kids will be 100% on board with serving as your retirement plan (obviously they’ll offer to…), you’ll want to get your ducks in a row here first.
2 Tips to Rule Them All…
You may have heard these before, but they’re certainly worth repeating (over, and over, and over again). First, time can give you a huge edge. The sooner you start saving, the more manageable the endeavor becomes, and more time maximizes the magic of compounding interest (cue high school math class flashback). Second, to the extent that you can build your savings into your budget as a bill, do so. The more systematic and automatic your savings, the greater your chance of success.
Now to the Nuts and Bolts of it All…
The method you utilize should generally be driven by your values and goals. Start by asking yourself these questions:
- What, specifically, am I saving for?
- Am I saving for college? Or should the funds be available for other goals in my child’s future such as a first home, car, or potential business endeavor?
- How many years do I want to save for? What is the time horizon for this plan?
- At what age do I think I’ll want my child to have access to the funds, if ever?
- How much would I like to have saved when it’s all said and done? If college is the goal, would I like to have the ability to fully cover in-state, out-of-state, public, private?
- How many children are in the picture? How many do I expect to be in the picture?
- What is my tolerance for stock market risk?
If You Want Funds Specifically Available for Education
The 529 Plan
There are several benefits that come with a 529 Plan. It’s a way to invest money on a tax-deferred basis for the purpose of covering education expenses. As long as the funds are used towards qualified costs, the money can be taken out tax free as well. Finally, certain states may offer a tax deduction for contributions made to the plan. It’s important to be aware that there are penalties associated with using money from a 529 Plan for non-education related expenses. Again, knowing your goals is critical.
If You Want the Funds to be More Flexible
This is an account that is technically owned by your child from day one. A parent can be named as the custodian of the account, managing and contributing to it until the child reaches the age of majority in their state and is able to take full control. The nice thing here is that any dollars invested in this type of account must legally be used for the benefit of that child. Beyond that, they’re flexible and could be used by, or for, the child towards any number of things. It’s great for the parent that wants to save for the very broad definition of their child’s future – whether it’s college or other goals.
A Roth IRA can be a great hybrid option for parents. It’s a tax-advantaged way to save for your own retirement. Then, if needed, contributed funds could be taken out penalty-free to cover education expenses for your child. It’s a way to be sure you’re keeping your future a priority and know there are still resources available to help your child if nothing else is set up.
More Options to Consider
This is a brief overview of three options. It’s important to consult a qualified advisor to get a complete understanding of all the components of each plan. There are also other strategies that might offer the best features for your unique situation. Sometimes a combination of different accounts will present the most suitable path. A financial advisor will help you align your values and goals to the best course of action.
A Final Note…
Consider ways to get your child invested (pun intended) in saving for their own future from as young an age as possible. Whether it’s from an allowance, Christmas and birthday cash, or their first summer job’s paycheck, planting this healthy financial habit early on will pay major dividends down the road.
Eddy Jurgielewicz is the founder and president of E. Francis Financial. Having been a high school teacher for a few years prior, Eddy brings much of the same skill set into his current role as an adviser – serving as an educator first and foremost. In doing so, he helps to provide clarity to even the most complex planning, allowing his clients to feel confident along the journey to achieving their unique financial goals. Eddy is also an advocate for the children of New Orleans. He is an active mentor with Son of a Saint and sits on the board of the Trinity Community Center, two programs working to enhance the lives of the city’s youth. When he’s not involved with these organizations or advising his clients, Eddy enjoys taking advantage of the local festivals, food, and the free morning workout groups that keep it all in check.