Raising a child from infancy to age 18 is somewhat expensive – though we have mentioned over the last few months that the ultimate cost will vary depending on what you choose to spend money on.
You can make children very expensive, but you also have control over what you choose to spend, as well.
It is estimated that it takes $240,000 to raise a child from infancy to age 17. That number does not include expenses like college, vacations, and all those extra activities like soccer, karate + more.
For us, the reward of raising kids is totally worth whatever it costs – so while we don’t want you to get scared over big numbers that might deter you from having kids (as they are truly a joy to have..) — you also need to be prepared to plan for their future as well.
529 College Fund
Although many parents may not be too familiar with a college fund for their children in the form of a 529 plan, it’s a very smart way to save for your child’s college tuition.
A 529 plan allows you to invest your money, post taxes, and that money grows tax free and remains tax free IF you use it to pay for tuition.
529 plans typically allow you to opt between age-based plans, OR, plans that allow you to have more control (perhaps you want it to be more aggressive for a longer period) – at least ours do for our kids. Some employers let you funnel money from your paycheck into your 529 plan… so check with your HR department, as that might interest you as well.
The limit on contributions is $14,000 per parent, per year, per child – regardless of income level – and in many cases you can make a draft as low as $25 per month – depending on the bank. If you are concerned that your child might not go to college, that’s OK too – because you can transfer the funds to yourself, your spouse, or any family member provided they use it for tuition.
Prepaid Tuition Plans
Some states afford parents the opportunity to take advantage of prepaid tuition plans – which allow you to buy tuition at today’s rate – which is great considering you will not have to deal with tuition increases. That prepaid tuition can be used at any school (private included!) in the country.
A Child Savings Account
This is an option for children – though I probably wouldn’t count on it too much for college fund purposes. Savings accounts tend to have very low rates – but they are a great starting point to teach your kids about money.
The savings account can be in the child’s or parent’s name – sometimes they will waive fees for low balances and waive the minimum account balance requirement. ING Direct is a great option for kids (with no minimum) – they offer teaching materials and help them learn about money.
Employer Sponsored College Savings Plan
Your employer might offer payroll deductions into your 529 plan – it’s something to ask your HR department about it. Some employers MIGHT also offer private scholarships to the children of employees – in the amount of $1,000 or $2,000. Every little bit can help defray the cost.
Brokerage Account
A brokerage account can be for adults and children alike – if you are using the Uniform Gift to Minors Act (UGMA) you can open up a brokerage account for your kids, you can invest in anything you wish and your child will gain full control when they are 18 or, 21 – which depends on your state, though there are NO tax benefits to contributing.
This type of vehicle is great if you want something that expands beyond college expenses.
In an UGMA/UTMA, your child will pay tax on the taxable interest, dividends or capital gains. While a 529 plan grows tax deferred and will be tax free to pay for tuition. The beneficiary cannot be changed in an UGMA/UTMA (it can in a 529 plan), and since an UGMA/UTMA is considered an asset of the child, it’s counted a little more heavily in terms of financial aid when your child starts college.
As the parent, you can add and withdraw money for your child in an UGMA/UTMA, but once a while is 18 or 21 (depending on your state laws) the money belongs to the child.
Those 5 vehicles are each slightly different, but each have their advantages / disadvantages – it’s best to weigh your end goals before making a decision on which might be the best option.
To Save or Not to Save for your Child?
Despite the avenue you take, one thing is certain: saving as early as possible will give you the benefit of compound interest over time – and it does add up quite fast. While many people may not want to pay for “all” of their child’s education because they feel like it might promote a sense of entitlement, I don’t think it’s wrong to help them with some college funds.
Making that commitment, for a minimal amount each month over the 18 year period is a great way to give them a head start. But it’s also important to teach them responsibility too.
Finding a happy medium is important, so is teaching them to be financially responsible adults.
At the age of 18 or, 20, I would hope that I have taught my children the techniques they need to be able to make wise money decisions ~ ie.
- Spending less than what they earn
- Saving the difference (perhaps emergency fund, retirement, etc.)
- Work hard, go to school should you wish (not always needed!) and keep learning over the years
- Avoid debt – stress the importance of contentment
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