The Best Way to Invest Money for Your Baby
With the price of a college education rising much faster than inflation, the best time to start saving for your child's education is the day she is born. Time is on your side when it comes to saving and investing, and long-term planning can really pay off when investing for your baby. But before you get started, sort out the goals you are hoping to reach with those investments. Planning for college is important, but parents might have other goals as well, like helping their child buy a car or a first home.
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Instructions
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Setting Aside Money for Long Term Goals
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Decide what the goals of your savings are. Determine whether you are putting money aside to pay for college or to build a nest egg your son can use to get a good start in life. Parents can set up two types of accounts--one that they add to on a regular basis for the child's long-term goals, like college and the down payment on a home, and another that they use to teach the child about the value of saving and investing.
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Use a college saving resource, such as Saving for College, to find information on 529 plans and other college savings vehicles in your state. Money put aside in these plans generally must be spent on legitimate college expenses.
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Research mutual funds for your baby. Putting even a small amount of money into a quality no-load low cost mutual fund now can result in a substantial nest egg down the road. Parents can open a custodial account in in the child's name, or open an account in their own names. Earnings in a custodial account are tax free for the first $850, then taxed at the child's tax rate for the second $850, providing some possible tax savings. Putting aside just $100 a month over the first 18 years of your child's life can provide a nest egg in excess of $48,000, assuming an eight percent return on the investment.
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Ask the mutual fund company for a prospectus, and review that document carefully. Pay particular attention to the section regarding fees and expenses, since high expenses can eat into returns over a long period. Vanguard, Fidelity and TIAA-CREF provide no-load mutual funds free of sales commissions. These companies also provide investment advice to clients.
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Set up a recurring monthly transfer from your bank account to the child's mutual fund account. This automatic investment allows you to buy more shares of the chosen mutual fund when the market is low and fewer when prices are high.
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Decide at what age you want to bring your son or daughter into the conversation about the money that has been set aside. If you have already used savings accounts and other investment vehicles to teach your child about saving for longer term goals, that can lay the groundwork for properly handling the money that has been so carefully invested. Getting your child involved in saving for her future is an excellent exercise in financial responsibility.
Teaching Your Child About Money
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Open a savings account for your baby as soon as your child arrives. Encourage grandparents and other family members to contribute to the account in lieu of, or in addition to, other gifts.
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Ask your bank what kinds of savings accounts they have for young children. Many banks have special young saver accounts designed to teach even the smallest children about saving and investing.
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Help your child open her first savings account by providing seed money. Encourage the child to save part of each monetary gift she receives for birthdays and holidays.
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Offer to match a portion of the money your child puts in the savings account. Use a strategy similar to employers' use of a 401k plan, and match 50 cents of every dollar up to a limit you set.
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Go over the account statements with the child, pointing out the interest that was earned on the account and the amount of money that was deposited each month. This can encourage a lifetime of saving and financial responsibility.
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- Photo Credit Baby image by Yvonne Bogdanski from Fotolia.com
