Growing up is HARD. Once you’re about 18 years old, most people expect you to start your life all on your own and that can be scary. Going to college, taking out a car loan, or moving out of your parents house can all be a lot. Financially speaking, these are some of the most significant choices a person has to make and most people have to start from scratch. What if, as parents, we can make this new start easy for our kids? What if we can lay the groundwork so our children don’t have to start at the beginning? What if you could give your child a head start? With these three tips, you can do just that!

1) Evaluate your Financial Goals and Expectations 

Now, I know you may be reading this and thinking to yourself, “I’m good with my money! I know my goals. I’m skipping to step 2!” Well, you shouldn’t. I have been budgeting and planning for my financial future for years and I can tell you with first hand experience that nothing prepares you for having your first child. Even planning ahead for having a child, I couldn’t have considered all the expenses that come with it until I was in it. From medical co-pays at the OB/GYN to buying all the baby stuff to even having to throw away meals because your wife’s favorite food smells appalling all of sudden, the numbers start to add up quickly and many I didn’t remotely expect.

So, now is the time to evaluate (or re-evaluate) your financial goals. First, you want to determine where you personally stand financially. If you still have significant debt or you’re living paycheck to paycheck, you will need to pay that down or restructure your lifestyle before you start saving for your child’s future. If you can barely pay your bills, putting money away for your child’s college savings might be out of the question. Now is the time to honestly determine where you are with your goals and make sure you are stable before trying to set your children up for the future. Just like you may have heard during an airplane safety speech, “place the oxygen mask over your own nose and mouth before assisting others.” Why? You can’t help anyone if you yourself can’t breathe.

So once you’ve determined how stable you are and how much help you can provide, it’s time to set your expectations. When it comes to your child’s future, you have a lot of questions to ask yourself, such as;

• Do you think you’ll need to pay for child care or can family help?

• Do you want your children to go to private or public school?

• Do you expect your child to go to college?

• Do you expect to help them with that cost?

• Is your home or apartment big enough for your family? Will it be big enough if you have more children?

• How many vacations do you want to take each year?

• Do you want to have a small savings set aside for your child’s future beyond college?

• How do you want to teach your children about money and saving?

And of course, there are even more questions than that. That may seem overwhelming to consider, but starting to prepare now will make it less scary once it becomes time to act on those questions. Whatever your expectations may be, most essential is, if you’re having a child with a partner, discuss your expectations together! If you are executing financial goals with someone else, it’s essential you are on the same page, especially with a child. Even if your partner doesn’t like talking about the family finances (just like mine), it’s absolutely essential. So, sit down, get comfortable, and DISCUSS YOUR GOALS AND EXPECTATIONS! 

2) Open a Custodial Account

A Custodial Account is essentially an investment account held by a financial institution by an adult for a minor, or in this case, a parent for a minor child. There are a few different types of accounts and we could discuss each account as its own article so this will be a brief synopsis of two main types that we would focus on when considering an account for a child; 529 College Savings Plan and UTMA/UGMA Accounts.

A 529 College Savings Plan (sometimes called a College Prepaid Plan depending on your state) is an investment account that is tax advantaged to allow you to invest your money tax free if you use it for qualifying education expenses. Think of it as a Roth IRA but for your child’s school. You invest your after tax income which will grow tax free AND you won’t pay any taxes when you withdraw it for qualifying expenses. Those expenses can be college tuition, Kindergarten through 12th Grade private tuition or even apprenticeship and student loan repayment programs. This can even include room and board costs during college as long as the student is enrolled at least half-time. Unlike a Roth IRA, there are no annual contribution limits so you can contribute as much as you like each year. This account also has little to no effect on tuition assistance and you can change beneficiary to another qualifying member. So, what does that mean? You can open the account before the child is even born! You would open the account with yourself or a qualifying family member as the beneficiary, then you roll the account over to the child prior to needing the money. That means you can even use the same account for multiple children. However, if you end up not using the account for qualifying expenses, you will have to pay taxes on your earnings and a penalty when you withdraw, in most cases. So, if you plan on your kids going to college or even just private school, this can be a great way to save for them.

PROS

• Tax Advantaged Account

• No Annual Contribution Limit

• No Impact on Financial Aid

• Can Open Account Now

• Can Use for Multiple Beneficiaries

CONS

• Only Tax Free for Qualifying Expenses

• Penalty on Non-Qualifying Withdrawal

• Plans are Managed by State

Then we have UTMA/UGMA Accounts (or Uniform Transfer to Minors Act/Uniform Gift to Minors Act Accounts) which are investment accounts managed by a custodian on behalf of a minor. These are very similar accounts with the main distinction being that an UGMA can only be used for financial assets such as cash, stocks, bonds, mutual funds, annuities, and insurance policies. An UTMA on the other hand can be used for nearly any asset to include real estate and even art. These accounts also have no contribution limits and no withdrawal penalties as long as the funds are used “for the benefit of the minor”. The account is not tax advantaged, however, so you will have to pay taxes on the earnings. That being said, the IRS considers the minor as the owner of the account and so the account will be taxed at a much lower rate. However, since the minor is an owner, an UTMA/UGMA account could affect their eligibility for financial aid when the child applies for college. All deposits are also irrevocable and you cannot switch the beneficiary like with a 529 plan. Once the money is in the account, it’s in the account until withdrawn for the benefit of the child.

PROS

• Can invest in Variety of Assets

• No Annual Contribution Limit

• Taxed at Minor’s Tax Rate

• No Penalty when used for “Benefit of Minor”

CONS

• Pay Taxes on Earnings

• Deposits are Irrevocable

• Cannot Switch Beneficiary

• Account affects Financial Aid

3) Make your child an "Authorized User"

35% of your Credit Score is made up by Payment History and 15% is your Length of Credit History. That means 50% of your credit score comes from how long you have had credit and how well you have been paying off your debts. So as a parent who has a healthy relationship with credit, has at least one credit card they plan to keep until their child is at least 18 years old, and you can pay that card off in full every month, then you can use this tip. You can make your child an “Authorized User” for that card. What that means is, you’ve reached out to the bank you hold the card with and requested they add your child as an “authorized user”. This is generally an easy process and can even be approved in minutes, depending on the bank. Once approved, use the credit card to make at least one purchase and pay that debt off, and it will start your child’s credit history and set them up for an 800 credit score by the time they start applying for student loans, rent at apartments, or their own personal credit cards. It is just that easy.

Now, depending on who you bank with there are some restrictions. Many banks have a minimum age for individuals to be made “authorized users” and most banks require a Social Security Number (SSN). Of course, there are plenty of banks who don’t have these requirements. For example, Bank of America, Chase, and CitiBank all have no minimum age requirement and they don’t require a SSN. They do require an Individual Taxpayer Identification Number (ITIN), however, which is for individuals who are not US citizens or are not eligible for a SSN. An ITIN can be applied for a minor who is at least 6 years old so that would be the only age restriction if that applies to you. For most children of US citizens, this wouldn’t even apply.

The Wrap-Up

There are a ton of steps you can take to set your kids up for financial safety, but these three tips are simple and can make a huge impact. You just have to remember;

• Evaluate (or re-evaluate) where you are now financially. You can’t help your children if you can’t help yourself.

• Set Expectations and ask yourself the tough questions.

• Discuss it all with your partner! Get on the same page.

• Custodial accounts can set your kids up financially so they don’t have to worry when they’re 18. Consider your expectations for them when deciding which is right for you.

• A good Credit Score can make a lot of things in life a lot easier. Why not set your kids up so they don’t have to worry, if you can?

Again, this was just a brief summary of how these tips can help your family. When it comes to what expectations to consider, which custodial plans may be right for you, or if you should make your child an “authorized user”, there is a lot more information out there to consider before making your decisions. Just keep learning and trying to educate yourself and your family. Financial Literacy is the number 1 key to Financial Success, so keep learning!

*Disclosure* This is NOT financial advice and I am NOT a Certified Financial Planner. All information is provided for educational purposes only and is not to be construed as advice. Everyone’s financial situation is different and requires individualized planning. Seek out a Certified Financial Planner for assistance with your own financial situation.