Parenting is a Journey
An Adventure of Discovery Not Only of our Children But of Ourselves as Well
A new year can be a time to rethink priorities. From getting healthy to making sure your finances are on the right track, the start of a new year can be the impetus for change.
Having a new baby can also get you to rethink your priorities, as any new parent knows.
With fresh starts in mind, here are four resolutions to consider so that your baby grows up to be a smart, and wealthy, investor:
Start a college savings fund — now
College can be an investment in a child’s future. Starting to save for child as soon as a child is born can be one of the best investments a parent will make to help their child.
Don’t wait a month or so after your child is born. Because if you delay it now, you know what will happen next — you’ll continue finding excuses not to do it and eventually your kid will be asking you how they’ll afford to go to college and you won’t have an answer.
A 529 plan is one way to save for college. Legally known as “qualified tuition plans,” they’re available in all 50 states as a pre-tax way to invest money. The other type of 529 plan allows tuition to be paid ahead of time at some colleges.
Whatever amount you invest regularly in a college savings account, it can only help your child possibly avoid borrowing money to pay for college. In 2015, 68 percent of graduates from public and nonprofit colleges had student loan debt, with an average of $30,100 per borrower, according to the Institute for College Access & Success.
Open a savings account for your child
The personal savings rate in the United States has dropped regularly since the 1970s, and is now at 5.7 percent, according to the U.S. Bureau of Economic Analysis. Americans averaged an 8.32 percent personal savings rate from 1959 until 2016.
If you want your child to be a saver, then open a savings account for them as soon as they’re born.
Why would a baby need a savings account? Because you’re likely to get some cash gifts either now or on their birthdays. That money is meant for the child, not for you to spend on a night out, so do the honest thing and put the money away in the child’s savings account when you get it.
Yes, savings accounts pay lousy interest rates now. Even if they do go up soon, it may be more profitable to put the money in a long-term CD or an investment account in the child’s name.
The point is to have some sort of account to put gift money in. If you’re feeling especially kind, contribute to it every month with an automatic deposit from your checking account.
Invest in one stock
For the cost of one share of stock, you can make your child a long-term investor by joining a Dividend Reinvest Plan, also known as DRIPs.
The compounding interest from paid dividends of DRIPs is reinvested to buy additional shares of the stock at little or no cost. You can enroll in a specific stock’s DRIP after buying only one share, and can contribute to it regularly with automatic debits from a checking or savings account.
You don’t have to regularly buy additional shares of stock, but you child will thank you in 20 years if you do.
At the very least, that one share of stock will show your child the value of investing for the long run. Who knows, they may want to someday invest their allowance there and end up investing in other stocks.
Invest in an index fund
If picking one stock for a DRIP is too risky for you, show your child the benefit of cutting investment costs by investing in an index mutual fund that has low expenses.
Since you’re unlikely to beat the market, find a mutual fund that mirrors popular groups of stocks and bonds, such as the S&P 500 index.
Mutual funds charge management fees, ranging from 0.06 percent on a diversified index mutual fund to 1.5 percent or more on an actively managed fund.
Do your child a favor and invest in a fund that has the lowest possible fees — which are usually index funds. Find one that is 1 percent lower than an actively managed fund and you’ll save tens of thousands of dollars over an investing lifetime.
You may not be able to successfully make all of these investing resolutions in the new year for a new baby, but two of them should be no-brainers: opening a savings account for any money given to your child, and starting a college savings fund.
Start the stock market investments if you can afford them, even if it’s only with a few hundred dollars. It will someday show your child how much you care about their financial future, and can be a way for them to learn how to invest on their own.
Aaron Crowe is a freelance journalist in the Bay Area who has a daughter, age 12. She has had a college savings account since the day she was born, and puts at least half of her birthday cash gifts in her savings account. Follow him on Twitter @AaronCrowe or read about his financial struggles at CashSmarter.com.