Here are 4 essential money tips that every parent with young kids should know.
Managing finances is daunting, especially when young children are added to the mix. As a parent, you’re constantly thinking about your child’s future, and financial security is a crucial part of that thought process.
Today’s newsletter will explore the top 4 most important money tips every parent should know. You’ll learn how to:
🧱 Build a solid financial foundation
⏲️Prepare for your children’s future
🗺️Navigate the complex world of personal finance when raising young kids
Read on to learn more!
🏫School is Cool 🎓
Save for future education costs. It helps you lay a fantastic foundation for your kids in today’s and tomorrow’s world, and the best part is that there are quite several tax-advantaged ways to do this.
For example, the mighty 529 plan lets you, as a parent, invest money for your child’s higher education, among other expenses. Any investments under the 529 grow free of tax, and any withdrawals you make for the plan’s qualified expenses (such as books, room costs, and enrollment fees) are also tax-free. 529s also include tuition at private K-12 schools of up to $10,000 a year and up to $10,000 on student loan repayments.
The 529 plan is also flexible, letting you switch account beneficiaries if your child does not want to attend college. The new beneficiary can be anyone from a range of family members. You can take out funds for several other expenses in return for a 10% tax penalty on the investment’s earnings and owing income tax.
Each state in the U.S. has its version of the 529 plan, but you can invest in any 529 plan you fancy, even if it’s from a state you do not reside in. It may come with you missing out on a state tax break, but so long as you get that investment quality, it’s worth it.
In picking a plan, avoid the ones with consistent negative returns or expense ratios exceeding 0.5%.
Another thing you shouldn’t do is save for this education at the expense of your financial well-being. Always remember that at some point, you will retire, so you must find a balance between saving for these two important events.
📃Secure Your Legacy
This is your cue to prepare or update your will. One of the biggest misconceptions people have is that young people don’t need a will— or that you must be extremely wealthy to make one. The truth is that so long as you’re a parent, a will or an estate plan is necessary.
An estate plan lets everyone know how you’d like your property and belongings handled in the event of your passing. If you have young children, most estate plans have a guardianship clause that specifies who takes care of the kids and how the leftover assets should be managed. Without a will, the courts or state government decide what happens to your kids— and that’s a decision that only you should make.
🏦Act as an Investment Proxy
If you wanted to invest money on your kids’ behalf in the past, you would have to leave it sitting in some bank account. Not anymore.
Custodial brokerage accounts let you invest in your kids’ names, so the money is all theirs– the only difference is that you control all activity until your children are adults.
Examples of accounts that let you do this include Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts.
Of course, there is a catch to investing as a proxy for your kids. And it’s in the fine print: all the money transfers to your kids when they reach adulthood (18-21, depending on state laws). All gifts, transfers, and any deposits made into the accounts cannot be revoked, and the beneficiary gets to do whatever they want with the money.
It then becomes a question of if you’re comfortable giving your 18-year-old all that money.
You could opt for alternative avenues, like the Roth individual retirement account for minors. Still, the snag there is it’s challenging, considering your child must have earned income in the first place for such an account to be opened. Since we’re looking at really young children, you may have to look at other options until they’re old enough to do any work.
🦸FSAs to Save the Day
Looking for a tax-advantaged way to save for the expenses you incur from child care? The answer is dependent care flexible spending accounts or FSAs.
FSAs are tax breaks offered through your workplace and allow families to save up to $5000 annually for childcare funds like after-school programs, summer camps, daycare, and babysitting charges.
There are several criteria you need to meet to qualify as a parent:
- Your kids must be under the age of 13
- This doesn’t cover some expenses like piano or dance lessons, overnight camps, and kindergarten tuition.
Building a secure legacy with your kids…
Every parent (existing or expecting) wants to set up your family for success. Taking the necessary steps to achieve that starts with deciding what to do. Saving for education, preparing your will, investing on their behalf, or contributing toward a dependent care FSA are great ways to begin.
