Whether you like or not, children come with a huge responsibility. For all the joy they bring in your life, they can also stress the finances. More than anything, it’s the college that may stress you the most as the tuition can be exorbitant.
However, we have good news for you. If you start early and use the right instruments, you can easily save for your kids and give them a secure life. More than anything, it will also help your children understand the value of saving money from an early age.
Here is how you can save money for your children.
Without a secure piggy bank, you may find it hard to save money. A savings account could be that formal piggy bank for you and your child. Several banks and credit unions offer a savings account that can be co-owned by parents and children.
The benefit of opting for such an account can be manifold. Firstly, you can teach your child to put any money received from grandparents or allowances into this account. Secondly, they will get introduced to banking at an early age. At a certain age, they will be issued their debit cards and checking accounts with controlled spending limits. You can teach them to save up if they want to buy something expensive. By doing this, you will also introduce them to a world of delayed gratification and hard work.
The flip side is, however, the return rates that are not very high.
Are you unsure if your child will go to college? Do you want to save up for a pricey gift for the future? If yes, then custodial accounts are your best bet. These accounts allow your children to own assets with the parents in charge. As they come of age, the assets get transferred to them. However, these accounts do not provide tax benefits as other college-savings instruments do.
529 college savings plan
The 529 plan is by far the best thing you can do to save for your children. However, there are two options that you need to know. The first one allows you to put aside your money and use it to pay at any educational institution. The best part is that you get tax benefits in some states for every contribution that you make towards this account. Besides, the withdrawals for legit educational expenses are also exempt from income tax. In the second option, the current tuition rates get locked and is a prepaid plan.
The benefit of a 529 plan is that there is no limit on the contributions that you want to make. In a good year, you can use your bonus to add more to your child’s college fund.
Mixing your retirement money and your child’s education should be done with proper planning. The best thing about Roth IRA is that it allows you to save after-tax money for your retirement. As per the rules in 2019, a person less than 50 years of age can save up to $6000 in this account. It also allows you to withdraw your principal amount without tax at any time. A person who has reached 59.5 years of age can withdraw the entire amount without any penalty. Thus, your age can become a determining factor to make this decision.
Apart from investing in these instruments, there are a few other things you can do to build a considerable college fund for your kids.
- Start early – The earlier you start investing for your child, the higher it will grow with time. Do it even if you can put only a small amount aside
- Be consistent – Once you start investing in a plan, make sure you stick it.
- Sell – Instead of being emotional about children’s belongings, try to sell them as soon as they grow out of it.
- Insurance – Shop around when you have to buy health insurance so that you can get the maximum benefits.