Getting Your Ducks in a Row
Creating a budget is crucial. Although you may not think you have any extra money to set aside for savings, you can always find ways to cut expenses. Paying off credit card debt is an important first step in financial planning. Then work toward creating an emergency fund with three to six months of salary saved away. Once you have these two basic but essential financial tasks completed, you can start saving for other necessities. For example, you may quickly realize that you need a larger home to accommodate not only a new child but all the stuff they bring with them. If a new home isn’t in the budget, consider self-storage to make room for all the clothes and toys, as well as free up storage space in your home (some facilities will even pick up your stuff for you). You’ll be surprised how much space is lost by adding one person. To learn more about budgeting, speak to a financial planner and/or a certified personal accountant.
During this time, it’s also important to make plans for your funeral, although it’s probably one of the last things you want to think about. However, in the event of your passing, it’s important to have as many things in order as possible to help protect your family and give them peace of mind during what will be a very trying time. One way you can prepare is to look into a pre-paid funeral, which will take care of any costs associated with your burial so your family can focus solely on grieving. Lincoln Heritage has an excellent guide that explains how this works.
Saving for Education
To avoid the temptation of spending, have your money automatically withdrawn from your paycheck and deposited into a savings account for your children’s college fund. If you receive additional money, such as a tax return or any inheritance, deposit half into the savings account. Likewise, if you get a raise, increase your contribution amount. Kantrowitz recommends using a 529 college savings plan.
According to Fidelity, a 529 plan is a college savings plan sponsored by a state or state agency that can be used for tuition, books, and other education-related expenses. Your contributions aren’t subject to federal income tax and may be eligible for state tax deductions. You can add up to $70,000 ($140,000 per married couple) per beneficiary per year without being subject to the federal gift tax. For more information about saving for college, contact a financial planner or a college near you.
Keep in mind that educational expenses aren’t college exclusive, as you will encounter daycare costs and K-12 tuition should you choose to send your child to private school. You may be able to find financial assistance via scholarships and grants. In addition, you can utilize a Coverdell Education Savings Account (ESA), which is similar to the 529 plan in that it is tax-free but can be used for elementary and secondary school expenses.
Other Saving Possibilities
Of course, you don’t have to save for college; there are other ways to help your child’s future remain bright. Blogger and financial expert Jeff Bogle told the Washington Post that he stopped contributing to his daughters’ 529 plans when he realized it was merely putting a dent in covering college expenses. Bogle determined that saving $1,000 per year for 18 years at a five percent return for each daughter would leave them with about $29,500. Pretty impressive right? Not when you consider that it may only cover room and board at a public college, which Scholarships.com claims can cost between $7,500 and $9,000 per year.
After deciding that the return wasn’t worth the investment, Bogle opted to instead spend the money on enriching opportunities such as traveling, cooking classes, and music lessons. Bogle decided it was more beneficial to raise cultured children who had experienced and seen the world while having quality family time. “Life isn’t all about building up a resume to get into college,” states Bogle.
The Right Balance
Perhaps you want to help your child pay for college, but don’t want to foot the entire bill. Working a job can provide valuable life experiences, and graduating from college with debt is a good incentive to get a job. That’s not to say you want your kid graduating with an absurd amount of debt. You just need to find an amount that you’re comfortable saving and that you also find helpful enough for your children. And you might find that you’d rather save money to help your child prepare for life in other ways.