Back around Christmastime, I chatted about our desire to not accumulate too much crap for Rory over the holiday season. We certainly didn’t need any more toys, clothes, or books and we didn’t want to overwhelm our house with too much stuff. Instead, we politely talked to the grandparents and encouraged them to instead donate to her college fund or even buy her a stock instead of bombarding her with too many presents.
When I shared this, so many of you had follow-up questions. How do you set up a bank account for your baby? What kind do we have? How do stocks work? Do we have a specific college fund set up for Rory? I honestly didn’t have all of the answers, so I talked to Finn and he agreed to eventually write a blog post on the topic. Well, that day has finally come and he is here to share his tips to benefit your child’s financial future. Take it away, Finn!
Finn’s Tips to Benefit your Child’s Financial Future
When the world blesses you with a newborn, there are a million thoughts that run through your head. “How many diapers do we need to buy? What the hell is 2T? And is that color of poop normal?” One thing might slip from new parents’ minds is developing a plan for their child’s financial future. But it really should be on the top of your to-do list after having a baby. You can help stabilize their savings, create a small investment account in their name, and allow your family and friends to begin funding future college costs.
On the bright side, these steps do not cost a lot, if anything at all, and they create peace of mind for you, the parent. You can begin saving and funding your child’s future without the added stress of having the money sit in your savings or retirement account. Properly creating the child’s own financial framework will help their money grow over time and teach them important life lessons as they get older.
Request a Social Security Number
Before you do anything, your baby needs to have a social security number. The hospital will likely give you the forms to fill out (that’s what happened in our case) and we sent them in immediately. We received Rory’s social security card a few weeks later. So you won’t be able to jump into my tips below until you have that precious SSN. I would recommend sending in the paperwork the first week you get home. Doing this task will help make sure those first few weeks provide something besides sleepless nights and Google searches of “Why is my baby crying?”.
Open a Savings Account in Your Child’s Name
The next thing to do won’t cost you any money. Head down to the bank and create a savings account in your child’s name, with you listed as a custodian on the account. Now, you can ensure the gifts they receive from family and friends are truly residing in their name and funding their future.
Even if the account has only a few hundred dollars at first, it will add up over time. Establishing this account also lets people know their gift is not going into your checking account to pay for groceries next week. It creates a savings opportunity for your child from day one and reduces the stress on you to separate their money in your own personal accounts.
Plus, I will obviously use it as a tool for manipulation later on: “Oh Rory, you didn’t want to do your chores? Well, I am going to Venmo myself $20 from your account for having to do them myself.” Parenting 101 is in session, everyone…. reverse allowance!
Create an Investment Account
This one can get much more personal and is dependent on your background and financial status, but even a very small investment account can help grow funds over time. For us, we use the site Stockpile. The reason I like this model is that anyone can buy you a gift card for a particular stock or for the market in general.
Giving someone $100 in a specific stock can be more rewarding than giving $100 cash. The prevailing logic is that down the line this investment will be worth more than the cash itself. By simply creating this small account and alerting the family to the plan, you create a tremendous money-making opportunity for your child’s future. It allows your child to begin reaping the benefits of economic expansion and hopefully, the stocks will grow over time, thus compounding their earning potential.
Family members can buy your child stocks and then every year, in perpetuity, those family members can remind your child of their innovation and generosity. (“Remember that time I bought you Google when you were in diapers? Who is your favorite uncle now?”) I think it is a creative, personal way to begin investing in your child’s future, especially if you feel you do not need a lot of “stuff” and would prefer something monetary for the child.
Research 529 Account
Unlike bank accounts and small investing accounts, a 529 can be a major investment for the parents. It essentially allows you to invest money, today, to help fund future education costs and it provides ongoing tax benefits.
However, these plans have their own unique set of rules and guidelines, so please be thorough in your research and decision-making. The rules can vary state by state and plan by plan. The 529 plan does provide a major long-term benefit if it is structured and utilized properly. It essentially pays for college with income that was never taxed. However, it also has a rigid construct in that it is intended to be used solely for educational expenses, so using it for any other reason warrants tax payments and a 10% penalty.
That option may be worth researching and discussing when your child is born, but it is a personal choice that should be made by researching and deciding what is best for you and your family.
Life Insurance for Parents
Life insurance is a smart way to invest in your child’s financial future. This can be a tough decision for people because the only payoff is a scenario where you are not around to see the benefit! However, even a low-cost term life insurance policy is vital to protect your children and family in the event of a tragedy. Setting up the adults on some level of life insurance coverage will give you peace of mind that your child’s future will be funded and protected.
I recommend a minimum plan for each parent that would cover all liabilities in the family and any outstanding home mortgage payments. Plus, the younger you are when you sign up, the better rates you get, due to health factors and policy risk. Casey and I got our life insurance policies set up right after we got married, when we were young and healthy, and we’re now set as we get older and our family grows.
Update Your Estate Planning Documents
It goes without saying that if you do not have a will or estate plan at the birth of your child, you should set one up. This was a task we tackled while Casey was pregnant with Rory because it was quite a process and we didn’t want to do it once the baby arrived.
Assuming you have an estate plan in place, it is important to check and make sure all the required updates are made to account for your children. In some cases, the estate document covers all children and won’t require any updates (that’s how ours works), but be safe and check out your plan to ensure everything is good to go.
Other Things to Remember…
- Update your health insurance and add your dependent to your plan.
- Review HSA contributions, because these pre-tax deductions are much easier to consume when children are involved (diapers, doctors, etc.)
- Monitor tax credits as most qualify for a tax credit when they have a child under their dependent care.
- Review FSA dependent care plans; similar to an HSA, you may be eligible to fund accounts with pre-tax income to pay for child care costs.
I hope this long-awaited blog post was helpful. While it may not seem as “fun” as gifting kids toys, these ideas will really benefit your child’s financial future. As always, feel free to ask any questions in the comments below. I probably won’t have the expertise to answer them, but I’ll be sure to nag Finn to share his insight.Casey