Newborn child, how to save/invest for them?

The one thing I love about IDO is that I can get quality advice and opinions on a wide range of topics. A lot of you are raising your children, or already have. A few weeks ago, my wife and I welcomed our first child into the world. A little girl who is doing great!

I don’t know a lot about investing in general, so I do need to educate myself on that. I am curious what you all did, or would recommend as far as starting a savings account or college fund or something for your children? We have some money that grandparents have given us for her, and I would like to contribute a small amount, maybe $20/month, towards something until she is an adult. Whether it is a savings account that is hers, and we can use it to teach her about money and savings as she grows up, hopefully teaching her about smart spending and money habits. Or something that would yield a better return and give her a start to paying for college, a house, car, whatever it may be. The one thing I don’t want is an 18 or 21 year old who doesn’t understand the concept of money, and gets $xxxxx amount of money and blows it on typical things that college aged kids like to do.

What in your opinion is the best way to start some type of savings or fund for a newborn?

For my Favorite Granddaughter we started a 529 college fund.

The earlier we start depositing money into a 529 college savings plan, the more time their money has to grow.

Talk to a financial planner about this there are penalties and restrictions you need to know before starting this.
Since it sounds like you don’t have a financial planner, get one. Not only for the collage fund advice but for yourself as well.

Wish someone would have told me about them 30 years ago…

Brian Klawitter wrote:

For my Favorite Granddaughter we started a 529 college fund.

The wife and I did the same for our daughter.

The only problem with a 529 is that you have to use it for college. If your intent is to allow the $ to possibly be used for anything else (house, start a business, etc.) it’s probably best to simply open a brokerage account (TD Ameritrade or some other online route) and invest the money there. You’ll probably have some tax implications depending on what you invest in, but they’ll be minimal until the investments are sold.

This isn’t to say that a 529 is a bad idea! It’s just that it ties your hands in terms of how the money can be used. They are slick because you don’t have to worry about taxes and you can allow anyone to contribute to them.

Best way you can invest for your kid is to be good dad and husband. A kid is like a sponge, they will soak up EVERYTHING they see & hear.

Now I’ll let the money guys address your main concern.

john23 wrote:

They are slick because you don’t have to worry about taxes and you can allow anyone to contribute to them.

This is one of the main reasons we went with a 529…the grandparents wanted to contribute.

Perhaps the best piece of advice in this thread so far is to get a financial planner to help figure out what your goals are and how best to achieve them.

Dutchboy wrote:

Best way you can invest for your kid is to be good dad and husband. A kid is like a sponge, they will soak up EVERYTHING they see & hear.

Now I’ll let the money guys address your main concern.

Dutchboy…that is the best advice anyone could get!

I agree with Brian on the financial part. There are many avenues in which to go and sometimes it could be a combination of such. Having a financial planner would consider your current income/expenses, other financial obligations and so forth and be able to steer you on a path that best meets your current and future goals.
BTW…congrats on you daughter! My two (grown) girls have now spawned 4 grandsons for me with another due next month!

First off, congrats MNR, to both you and your wife on the new addition!

As others have stated, now’s the time to find a financial planner! We started 529 plans for our sons (now aged 7 and 5) the month after each was born. It is very rewarding to watch the money grow and every statement shows the value of getting started EARLY! One of your best investment assets is time.

A 529 plan, again for the reasons stated above is the way to go for most people, but every situation is different. A financial planner will help you make the right choice for your specific situation. By financial planner, BTW, I’m talking about a Certified Financial Planner (CFP). These are independent professionals and they are required to work in your best interest and to disclose specifics to you about who and how they are being compensated.

One thing to warn you AGAINST. Do NOT get hoodwinked into life insurance as an investment. There are so many scammers and shady outfits pushing this on parents and playing on unfounded fears. Life insurance is for adults and its purpose is to replace lost income and earning potential should one or both adult family members die. It is NOT an investment.

john23 wrote:

The only problem with a 529 is that you have to use it for college.

This is only somewhat true and is a common misunderstanding.

A 529 plan must be used for a “qualified educational expense”. That could include college, technical or vocational schools, specialized educational institutes, and many other avenues beyond traditional college.

Also, there are many options for the plan founder to pull back or redirect the money should it not be used by the child. Parents can use it for their own use so long as the expense is qualified. For example, there are any number of cooking schools in Europe that are eligible. It can be redirected to another sibling or there are other options.

Keep in mind, if you just invest in a non-tax-sheltered account, you will be hit for taxes twice on the money. Once when it is earned (before investing) and you’ll be hammered again when the investment is sold. This can take a very significant bite out of any investment and this is a chief advantage of a 529 plan.

Grouse

your commitment to making regular contributions is the right answer. priorities, right? the day i can’t contribute to our college plan is the day the boat goes up for sale. start small with whatever you’re able, and increase the amount over time if you can. using direct deposit is a great strategy for this, as you only have to make the decision once instead of the risk to waver on it every paycheck.

like many, we’re using a 529 plan.
I’m not sure about the rules in MN, but in WI even contributions from family members are state tax deductible. it’s a nice incentive for grandma and grandpa to make a gift contribution on special occasions if they live in state.

Thanks for all the advice so far! Most of what I researched prior to this was pointing me towards a 529. And yes, you are right, we do need a financial planner. While we are very good at watching our revenue/expenses through strict budgeting of every dollar we spend each month, I do need some guidance on our long-term financial goals and making the most of what we have.

“One thing to warn you AGAINST. Do NOT get hoodwinked into life insurance as an investment. There are so many scammers and shady outfits pushing this on parents and playing on unfounded fears. Life insurance is for adults and its purpose is to replace lost income and earning potential should one or both adult family members die. It is NOT an investment.”

The fact that you are recommending against life insurance as an investment in all scenarios makes me question whether you should be making any recommendations at all. It is not THE solution, but it is A solution… and can be a very good one at that.

It’s a great option for the conservative-minded investor looking for a return of +- 6% that does not want to be subject to market volatility. The very low cost of insurance for kids under 21 is what makes these yield outstanding results.

I agree that there are scammers and shady outfits pushing this on parents and playing on unfounded fears, but applies to any situation where the exchange of money for product is involved.

TheFamousGrouse wrote:

Life insurance is for adults and its purpose is to replace lost income and earning potential should one or both adult family members die.

Completely incorrect information there Grouse! There are many uses for Life Insurance other than replacing income. Two biggies are Estate Planning and Business Succession. The Life Insurance need is to pay huge tax bills at the time of death. This allow a tax free transfer of assets to family members or business partners. Also provides tax free income at retirement to the insured if they outlive the insurance need. As Joel mentioned, this is a valid way to accumulate tax free cash value for the child.

One comment on financial planners. They all need to get paid. You need to fully understand and be comfortable with how that works. Either a commission on a sale of a financial product or straight up hourly charge (like a lawyer). Most work on commission. So they will push the products they are licensed to sell. This may not always be the best product for your particular situation. Ask the question before spending one cent.

-J.

Off topic Life Insurance example.

When I refinanced our house 15 or so years ago, my fw wanted insurance to pay off the house if I kicked the bucket.

The bank wrote a policy into the loan and although I don’t recall the exact amount, we would have paid over $30k for this when it was all said and done.

I spoke with our FP at that time and he sold us a term life policy that followed the pay down of the loan amount.
When all was said and done, I paid $15K.

BUT if I didn’t have a claim, at the end of the term I received a check for $15k.

In this case the loan insurance cost me nothing except the interest. Win, Win, Win.

PS I thought I hand to pay a financial planner upfront. Not so (at least in most cases).

I wanted Bernie Madoff but I haven’t been able to locate him lately.

Joel VandeKrol wrote:

The fact that you are recommending against life insurance as an investment in all scenarios makes me question whether you should be making any recommendations at all.

Where did I say “all scenarios”? Reread my post carefully.

I am fully aware life insurance has its place. My comments were in the context of a new parent planning for college. My problem with life insurance is how it’s aggressively marketed to new parents and very often in absence of comparing and presenting of other options.

OK, so maybe my emphasis was a little strong, but so are the emotional sales pitches that often accompany this product. My “advice” is to talk to a CFP and take their professional advice based on the OP’s real-life situation. If life insurance really is the best option, so be it, as long as this is the recommendation of a true fiduciary.

Speaking of giving advice, you have not mentioned that there are a vast range of investment choices within 529 plans, so life insurance is certainly not the only way to minimize market risk.

Life insurance for adults as part of estate planning and for other needs is a totally different conversation.

YMMV. Seek professional advice.

Grouse

should be making any recommendations at all.

Since the above was the topic of the last post…

Dear MR Rabbit,
IMO and it sounds like the others agree, don’t take any recommendations from the guys on a fishing web site (including mine)…except get a financial planner.

It’s like a FP asking a group of FP’s how to catch a walleye in a tough bite.

You did not say “all scenarios’ verbatim, but it was implied as a hard and fast rule that Life Insurance is NEVER an option for investing.

If someone provided incorrect advice toward 529 plans I would have addressed it no different than my previous post. I don’t favor one over the other.

children are investment and imo, the best thing you can invest into your children is time…. you will get out what you put in. If you have the means I would recommend a 529 as well.

Using life insurance as an investment tool is like using a hammer to pound screws. Sure, it’ll get them in there, but you should probably be using a screwdriver. There’s a reason life insurance salesmen want you to use the hammer – it’s the only tool most of them are legally allowed to sell.

I’m not a licensed financial expert, nor did I sleep at a Holiday Inn Express last night. However, I am capable of reading and understanding what amounts to basic math. Instead of spending $100/mo for a “cash value” life policy with exorbitant fees and low returns…spend $10/mo for a standard term policy for the same amount. Take your other $90 and invest it in mutual funds with a real stock broker for a +/- 10% rate or return and way lower fees.

We started a 529 for our daughter when she was born. My wife and I graduated from Macalester College in St Paul and the estimated cost of attendance there for 4 years starting in 2032 was pushing 500K (making certain assumptions about the rate of inflation, rising tuition costs, etc)! Know that your state of residence does NOT dictate which 529 you choose. For certain tax brackets it may make sense to choose the Minnesota or Wisconsin 529. But for us (oh good for me!) there was no tax incentive to do so and we chose to invest in the Utah 529 because at the time they had some of the best returns/investments products (Vanguard).

Michael C. Winther wrote:

Using life insurance as an investment tool is like using a hammer to pound screws. Sure, it’ll get them in there, but you should probably be using a screwdriver. There’s a reason life insurance salesmen want you to use the hammer – it’s the only tool most of them are legally allowed to sell.

I’m not a licensed financial expert, nor did I sleep at a Holiday Inn Express last night. However, I am capable of reading and understanding what amounts to basic math. Instead of spending $100/mo for a “cash value” life policy with exorbitant fees and low returns…spend $10/mo for a standard term policy for the same amount. Take your other $90 and invest it in mutual funds with a real stock broker for a +/- 10% rate or return and way lower fees.

How many people do you know that buys term and actually invests the difference?
Good Concept but poor follow through for most people.
Also, Life insurance will guarantee the insurability of the child. Who knows what will happen in the first 18 years of life? A good CFP will direct you will a combination of several ideas.

Congrats, Start with yourself first. If possible go to a 15 year mortgage. Get life insurance and have a will. Fully fund your retirement. Remember they make loans for college but not for retirement. We opened a 529 for our 17 month old before he hit one. Ours is 50 a month and then we put in any money that he receives. Talk to a CFP and get your numbers.

http://www.cfp.net/utility/find-a-cfp-professional?utm_source=find-cfp&utm_medium=footer&utm_content=homepage&utm_campaign=sidebar

Lists CFP’s (Certified Financial Planner). They have nothing to sell and do not work on a commission. They are fee-based and give advice for your specific situation.