First, congrats to you and your new baby. I’d say fortunate to have a parents who, in the midst of all the new baby responsibilities, is already thinking about the future.
The fact that raising a child comes with an increasing financial burden. This is because the expenses associated with raising children come before they’ve even been born!
Setting aside money is the best way to prepare for upcoming expenses. You’ve already started this important habit by making wise financial decisions today. Whatever the future holds, always having a secure financial base for your baby will keep on track.
Best Investment Plan For New Born Baby
Determining what to do with the money you’ve already saved depends on your intended purpose for saving it. Whether you plan to use your money for college or for other financial interim goals, there will be many additional financial goals your baby will need to meet in the future. Each of these interim financial goals requires a specific plan of action.
For college savings consider a 529 account
529 plans are state-sponsored programs that allow people to save for a child’s college education. Instead of saving in a child’s name, the money goes into an account that belongs to the parent, grandparent or another family member. 529 plans are considered tax-advantaged and the best way to plan for higher education.
529s often feature age-based investment portfolios that are professionally managed. These portfolios include tax-deferred earnings. You don’t pay any federal taxes on the money withdrawn when using a 529 plan for qualified education expenses like tuition, books and room and board. Some 529 plans even allow you to withdraw up to $10,000 tax-free for K-12 tuition expenses.
Some states have specific contributions or opening minimums. You’re not limited to using services offered by your home state’s 529 plan, as you can use any financial institution. Before choosing a financial provider, you should consider any tax benefits offered by your home state’s plan.
With a special election, you can invest up to $75,000 in one sitting as a single filer or married couple filing jointly. This is equivalent to five years of contributions at regular speed; however, it doesn’t incur any gift taxes. Plus, setting up automatic contributions is easy— just $50 or $100 a month— making it easy to save money and add to your investment.
For other needs designate different accounts
Additional accounts aren’t just for college. Consider opening up a music class or private school account for your baby. Consider these accounts as you plan ahead for the future— such as putting money aside for music lessons or private schools.
Custodial brokerage account: A child’s UGMA or UTMA brokerage account gives them advantages over a 529 plan. It’s managed on their behalf by their parent or guardian and offers them minimal tax advantages. These accounts have very few limitations— they can be used to pay for daily expenses but shouldn’t be invested in any curated portfolios. Money management is primarily decided by the individual at 18, 21, or 25 years old, depending on the rules of the given state. Additionally, they can choose from a wide range of investments: mutual funds, ETFs, bonds and fractional shares. These choices are based on the individual’s risk and reward preferences.
Regular brokerage account: You can open a custodial brokerage account in your baby’s name and earmark the savings and investments for her. Then you can use the money however you see fit. Like a taxable account, you can choose from many different investments with this option being available to you.
Passbook savings account: This account could serve as interim savings for when expenses come up. Plus, she can start contributing once she’s older.
Stocks offer the greatest potential for long-term growth. However, they’re very risky and shouldn’t be used for goals that last longer than five years. CDs and savings bonds are a safer option; they have a lower chance of losses but provide low-interest rates.
Time to create a plan
529 college savings plans are a great way to save for your first goal: college. 529 plans are owned and administered by the federal government; this makes them more tax-friendly than custodial and brokerage accounts. 529 plans also offer the potential for tax-free earnings for qualified higher education expenses.
Creating a budget and creating a family estate plan are essential steps when creating a new family. At the same time, you should use online calculators to determine how much money you need to save each month based on your budget. This way, you can ensure that your family is prepared for any financial emergencies without any gaps in coverage.
Looking into brokerage accounts or passbook savings accounts for additional expenses is a good idea. Or you could use one to track expenses on a monthly basis. Ideally, you’d set this up as an automatic payment so it wouldn’t need to be manually edited.
Don’t forget your baby’s financial education
As your baby ages, involve her in the process. Have her create her own savings goals and help her save a portion of any money she earns. By sparing her from the need to be financially dependent, this early-learning tool helps develop an appreciation for growing money and shows her how to make good money choices. Whoever sets aside savings for their child is doing them a great favor.