Best way to save for a child?

So part of being an "adult" is trying to plan ahead (at least, according to my wife), so we've been thinking about the best way to sock away money for the little ones (4 and 1).

I've tried arguing that if we sink everything we'd save into karting lessons now & race support throughout their years, they'd be fine, but swmbo thinks that maybe we outta have a slightly more "robust" plan in place as well...

It looks like just opening a savings account in your child's name can screw them when it's financial aid time for college, but a 528 plan can screw everyone if the child decides college isn't right for them. I could always open another savings line and just set aside cash, but I'd like to be proactive now, since they've got a minimum of 14 years to compound interest.. I've read some people set up Roth IRAs, but, like a 528, there are some pretty serious restrictions on how the money can be withdrawn without penatly...

Any advise?

Booze, hookers, and blow?

Seriously, I got nothing. Whatever you choose will be wrong, IME.

Tell them you'll sell the lazy one to support the hard working one. That should motive them.

way to plan ahead man. I ain't there yet, still paying off my current student loans. Ugh.

research shows that children/young adults who pay their own way via grants, loans, and the dreaded 'job', get better grades, not worse, and come out the other side more rounded, and with better real world skills. im not saying you should just throw em to the wolves at 18, but don't think they only way they will ever succeed in life is to pay some liberal college a hundred grand...

as far as savings go, id recommend property. it sounds crazy, but look at it like this: get a cheap condo/small house, something you can pay off in 10 years. rent it out to pay its own mortgage, while your 'savings' goes into pay extra (pay off a 15 year mortgage in 10). if the kids decide college is the path, sell it and help them pay the bill. if not, then use the rental income from the paid off house/condo to help them with trade school, music lessons, whatever they wanna do. either way, you can be somewhat creative with the taxes and sales money and avoid the liability that comes with cash assets.

my 0.02...

-J0N

Buy a bunch of pseudo someday classic junk cars and let them lay around for years. Every time my kid wants money for a class trip, or dance classes, or soccer whatever, she has to go out back and pull a part off of the money trees and put it up for sale. She learns how to turn a wrench and learns that my junk cars in fact have value.

Keith- I like it! Now, do you think we need to have another one so we can sell them off, to make sure the first two understand we're serious? Or do you think we could get away with fabricating a sibling that was already sold?

jmthunderbirdturbo wrote: research shows that children/young adults who pay their own way via grants, loans, and the dreaded 'job', get better grades, not worse, and come out the other side more rounded, and with better real world skills. im not saying you should just throw em to the wolves at 18, but don't think they only way they will ever succeed in life is to pay some liberal college a hundred grand... as far as savings go, id recommend property. it sounds crazy, but look at it like this: get a cheap condo/small house, something you can pay off in 10 years. rent it out to pay its own mortgage, while your 'savings' goes into pay extra (pay off a 15 year mortgage in 10). if the kids decide college is the path, sell it and help them pay the bill. if not, then use the rental income from the paid off house/condo to help them with trade school, music lessons, whatever they wanna do. either way, you can be somewhat creative with the taxes and sales money and avoid the liability that comes with cash assets. my 0.02... -J0N

J0n - Yeah, I'm not going down the path of property at this point.. I'm still ~30k in the hole from our last "real estate is always a good idea!" purchase of a house. That one won't come for a long time.. We don't want to completely pay for college or anything, but my wife was able to make it through grad school having "only" 20k of "real" debt, the other 25k was funded by a 0% interest loan from her parents (which we're still actively paying off). It would also be great to have some throw-around money if one of them wants to start a company and is having trouble getting things off the ground or whatever.

Fueled by Caffeine - Yeah, we're not completely free and clear by any means yet, either, but I'm thinking that $40/month now is worth a lot more than scrambling for $5k 18 years from now...

Tr8Todd - I like it! Right now, my 4 year old would love to help too.. Let's hope that follows through when she's, say, 16 or so :)

Awesome man.. Awesome. My favorite way to save is to set up an online savings account, Capital one 360 or Ally and have the money deducted painlessly and automatically from your checking account every month. Small amounts per month add up quick, if you forget about them.

Here's what we did / were told:

Don't go the 529 plan route. Several financial advisors were happy to hear that we didn't have one when college time came. Basically, colleges look at however much you have in the 529 and immediately take that much off the top of whatever they were going to offer you.

A savings account is going to earn you about $0.79 per year in interest these days. Not a good growth plan.

I would look into high-growth investments for now, and then move the money into annuities when college time approaches. Annuities are stable, because they shave a percentage off the increases in value, but by the same token, you don't suffer the full loss when things go down. And because there is the infamous "substantial penalty for early withdrawal", they are not considered liquid in terms of financial aid.

The year before college, we moved the majority of our liquifiable assets into 10-year annuities, which are invisible to financial aid. There are shorter versions, but our kids will be going to college back to back, so this keeps the money effectively off the books while both kids do their 4 years each.

Each of the girls had a few thousand dollars in their own names from gifts, savings, and inheritance. We used DD#1's money to buy her a car. With DD#1 about to graduate college and DD#2 about to graduate HS, we are now using #2's money to pay off a portion of #1's student loans, and giving DD#2 an IOU for that amount. We will repay her the cash, as well as an equivalent gift, once she's out of college. This way, the money is off the relevant daughter's books while she is being considered for aid.

The automatic deduction is key. If you have the discipline, then you can add on top of that. My savings plan is automatic deduction + "amount equal to what I want to spend on toys"

It slows down the toy buying, and greatly expands the savings.

jmthunderbirdturbo wrote: research shows that children/young adults who pay their own way via grants, loans, and the dreaded 'job', get better grades, not worse, and come out the other side more rounded, and with better real world skills. im not saying you should just throw em to the wolves at 18, but don't think they only way they will ever succeed in life is to pay some liberal college a hundred grand... as far as savings go, id recommend property. it sounds crazy, but look at it like this: get a cheap condo/small house, something you can pay off in 10 years. rent it out to pay its own mortgage, while your 'savings' goes into pay extra (pay off a 15 year mortgage in 10). if the kids decide college is the path, sell it and help them pay the bill. if not, then use the rental income from the paid off house/condo to help them with trade school, music lessons, whatever they wanna do. either way, you can be somewhat creative with the taxes and sales money and avoid the liability that comes with cash assets. my 0.02... -J0N

Research also shows that paying $500 a month in loans for 10 years when you get out of college sucks. Just sayin.

I'm planning on keeping a non retirement investment account in my name. I think current law is that I can gift, combined between the wife and I, up to $28K a year to each of my children. That should cover most any in state college or help with an out of state. It also allows me to pull support if they are being stupid.

Or the option of you pay your way through college and when they finish I can pay off their loans. Because I do believe that working your way through college is the far better option.

Buy property in hip, mountainous resort/college town. Rent to college students. Make bank.

When kids go to college, offer for them to go college at this college town, free rent means more money for booze.

When kids graduate, sell rental, make bank, help them with loans.

If only it were so easy...

Johnboyjjb wrote: Or the option of you pay your way through college and when they finish I can pay off their loans. Because I do believe that working your way through college is the far better option.

Do this. By all means, don't let them be lazy and not work. But it is a rare person who can go to school full time, work enough to earn $20,000 (or more!), and maintain something resembling a social life.

And yes, I worked 2 jobs all through college.

Interesting to note the reaction to 529 plans. I have ones setup for both of my kids, I figure if they don't go to college, they will go to school of some sort. Wasn't aware it could affect your financial aid offer.

And if you think paying $500 a month for student loans sucks, try paying twice that for your spouse's loans, paying it off, then re-marrying and doing it all over again. Grrrrrrrrrrr.

Just like any investment, make sure a rental makes sense before you dump any $ into it. Its pretty easy to buy one that doesn't make much $$ for you (or you lose $ on), and is a complete time-sink. A total market fund is a much easier/lazier way to make 7% inflation corrected in the long run. $40/mo is about $17K 18 years later.

As far as when to transfer things over to bonds/annuities/other things (invisible to financial aid? this is possible?), I would like to know more. Maybe Duke can elaborate.

We had DD#1 borrow some money each year so that she had some skin in the game, even though we could have easily afforded that amount. Now that she's successfully completing her last year and been on the Dean's List the entire time, we're planning to pay off the full amount of her loans, except maybe the accrued interest. We are NOT, however, just dropping her a big wad of cash. We're applying it directly to the loan balance.

DD#2 will probably need to borrow a little more (she probably isn't going to our state school, and probably won't get as aggressive a scholarship package).

ProDarwin wrote: As far as when to transfer things over to bonds/annuities/other things (invisible to financial aid? this is possible?), I would like to know more. Maybe Duke can elaborate.

We closed our regular investment accounts (not IRAs and 401ks, just whatever was effectively liquid) in the fall of DD#1's senior year in high school. This got the money off our books before her FAFSA was submitted in January/Feb of the year she would be starting college.

I don't know the exact name of the annuity, but we have a fund from Principal. There are hundreds of others available.

Duke wrote: Don't go the 529 plan route. Several financial advisors were happy to hear that we didn't have one when college time came. Basically, colleges look at however much you have in the 529 and immediately take that much off the top of whatever they were going to offer you.

Isn't that true of any investment asset other than a 401k?

FWIW, I have a friend who's a "wealth manager" (near as I can tell, that means he's a financial advisor for people with a lot of money :) ). He does NOT have a 529 for his 7 year old son because he does not like the lack of control. IIRC, he puts money in his son's name every year and manages it himself.

Datsun1500 wrote: I saved up for a child for a year or two. I then found out I couldn't buy a child, so I bought a car instead....

This is the best advice in the thread, although it came about 5 years too late... (Just joking, I love my kids!) :)

Lots of interesting discussions, thanks guys..

Duke - I'm going to get in touch with our company's investment/financial guy (who has stressed to contact him about anything like this) to see about rolling it into annuities like you have when the time comes. That seems brilliant...

JoeyM - Absolutely.. We I have two "savings" accounts that are automatically transferred into, one is just a replacement funds for when things break, and then one is our long term "savings." Of course, Roths, retirements, and all payments are also automatically transferred.