Investing in your kids: A guide for parents saving today for the expenses of tomorrow
Do you have young children? If so, you already know how expensive they can be. Some of the expenses include diapers, daycare, formula, more diapers and so on.
But wait: Have you put much thought into the expenses that may occur 10 to 15 years down the road? Some of these include K-12 costs, a first car (this is scary to think about), college or trade school or a wedding. The list could go on and on.
If you are like me, these expenses can seem daunting. Where do you start?
This article is intended to help you to begin thinking through and saving for the expenses of tomorrow.
Setting financial goals
To start the savings journey, it is important to define specific financial goals for your children. Consider their educational needs, potential extracurricular activities and major life events that could occur.
Do you plan to assist with the funding of some or all of these goals? If so, begin thinking through what that might look like. The questions below can help you get started:
▪ What expenses do I want to help cover for my child? List these.
▪ How much am I willing to set as a funding goal? This can be a dollar amount or percentage of the overall cost.
▪ How do I want to get my child involved? Possibly a part-time job, when of age, or even detailed conversations about the savings plan. Allowing your child to have ownership in this process can build positive financial habits.
A well-thought-out strategy could ensure that you are financially prepared for the milestones ahead.
Creating a spending plan
Begin by evaluating your current financial situation. Analyze your income sources and monthly expenses. This process can help you establish a realistic spending plan that allows for adjustments to be made.
Once you’ve established a budget, allocate a specific percentage for your children’s savings. Start small but be intentional.
Consult with a financial advisor if you need assistance with this process.
Establishing an emergency fund
One aspect of your spending plan that you should focus on is the creation of an emergency fund.
This fund acts as a safety net. It can provide a financial cushion for those unexpected expenses. By having this fund in place, you can protect your children’s future savings from being disrupted.
Choosing the right savings vehicles
▪ Savings/money market account: For short-term goals such as a family vacation, a traditional savings or money market account could be a good option. It offers liquidity and easy access to funds when needed. These accounts are also great places to build your emergency fund.
▪ 529 college savings plans: Designed for education expenses, 529 plans provide tax advantages and long-term growth potential. A 529 plan grows tax-deferred and comes out tax free if used toward a qualified education expense. Your state may also offer a state tax benefits and other benefits for investing in their in-state plan.
▪ Custodial accounts: Custodial accounts allow you to invest on behalf of your child, with them gaining control of the funds at a specified age. This provides flexibility and potential growth for long-term financial goals.
▪ Investment/brokerage accounts: These accounts allow you to diversify your investment portfolio across a wide variety of investment vehicles that provide an opportunity for long-term growth.
I believe it is important to discuss these strategies with a financial advisor, who can help you determine your risk tolerance and provide a comprehensive strategy that makes sense for you.
Laying a financial foundation for yourself and your children can be a gift that keeps giving.
By setting clear financial goals, creating a budget and establishing a savings strategy, you may gain assurance knowing that you have a plan for those daunting expenses of tomorrow.
Nolan Keim is a CERTIFIED FINANCIAL PLANNER professional and an active member of the Financial Planning Association of Greater Kansas City. He serves as a wealth advisor for Mariner Wealth Advisors in Overland Park.