A lot of parents come to me for advice on how to save for their children’s futures. Most of the time, they ask if a 529 account is the best way to do it.
Saving for your kids is not just about the best types of accounts to open. You may need to assess your goals for what you want them to learn and what you personally want to contribute to your child’s financial well-being.
Before I work with parents in developing a financial strategy and make recommendations on what types of accounts they can open for their children, I ask them to first answer these three questions.
What money lessons do you want to teach them?
Teaching your kids about the value of money and how to manage it can be critical since they will be on their own one day. There are many ways to teach them.
Many parents I work with who have put money into UTMAs or UGMAs for their kids regret it because they didn’t realize that they have to relinquish full ownership of the account to their kids outright when they turn the legal age of 21.
The potential result of children being unaware about important money lessons can lead to negative ramifications for you, as well, including having to continue financially supporting them because they cannot properly manage their money or don’t know how to earn it on their own..
What big expense items do you want to afford for them in the future?
A typical large expense is buying a car for your child when he or she turns 16.
If you’re planning to do so, is it going to be a new car or a used car? There may be a huge difference in what’s required of you to save depending on the year, make, and model of the car.
Instead of paying for the car outright, you can create a financial payment plan that involves your child contributing a portion, even a small one, towards the total price. Perhaps this can be your child’s first experience in jointly saving with someone and working towards a common goal.
Make a list of potential large purchases you want to make for your child that will require you to start saving today.
If you’re planning to pay for their future college expenses, what percentage of it do you want to cover?
This goes back to what money management skills you want to teach your children.
If you don’t want to cover 100% of your kids’ college expenses — and that includes utilities, housing, phone bill, food, groceries, student fees on top of tuition expenses — there are several options you can “negotiate” with your kid to meet those expense needs.
For instance, you can agree to pay tuition, housing, utilities, and book supplies, but your child will have to cover other expenses such as entertainment, dining out, student activity fees, and any other expenses that are considered “for fun” or are not deemed a necessity.
If you’re currently only saving in a 529 account, remember that those funds can only be applied towards tuition, on-campus room and board, and books. If you use the money for any other expense, you will encounter a penalty of 10% plus income taxes.
Plan for realistic spending: Many parents will spend money on more than just tuition and housing expenses for their children while they’re in college. This may include continuing coverage on their cell phone bill, car insurance, health insurance, laptops, groceries, and any other “basic” living expense they will need while they’re studying at school.
This may mean asking yourself what financial actions you want to take for your personal situation such as:
Do you want to cover 50% of their tuition and they take out loans for the rest of it?
Do you want to cover only their living expenses and they are solely responsible for paying the tuition?
In order to develop a savings plan, be very specific about what you are willing to cover for your kids while they are in college. Make a list of expenses and project how much it will cost you in the future to afford that type of lifestyle for your child while he or she is in college.
Don’t be afraid to talk to your kids about money. They will learn their lessons somewhere if not from you; you want to make sure they’re picking up responsible money habits.
As a parent, it’s important to discuss with your kids how money is earned, spent, and saved. This can help them be more aware of their future responsibilities and know what to expect in managing their finances.