Raising kids is costly. You'll spend money on food, clothes, education, medical bills, birthday presents, extracurricular activities, and much more. Parents often want to know how to save money for their kids.
A strategic saving plan is essential if you want to avoid money worries in the future while raising a family.
Based on research from the U.S. Department of Agriculture (USDA), married couples (on an average income) with a child born in 2015 can expect to spend approximately $233,510 (without accounting for inflation) to raise them through to age 17. Food, shelter, and other necessities are some of the expense categories.
The cost of raising a child hardly ever goes down. With inflation and the rising cost of living, it is essential more now than before to save money for kids. The following best ways to save money can help you get started.
How To Save Money for Kids
1. Kids' Savings Account
Contributions to your child's savings account is your first commitment to their financial success.
Banks and credit unions offer kids savings accounts that parents can use to save an allowance for their children.
Restrictions and requirements exist depending on where you open the account, but all kid's savings accounts can accept recurring transfers, gifts, or deposits. They are accessible to both kids and parents. Some banks may limit transfers from the savings account to the parents until kids are of a certain age.
Most traditional banks waive monthly fees for these types of accounts and have low to no minimum balance requirements. Online banks don't have any maintenance fees and earn high yields.
2. Custodial Account
The custodial account is an investment account for kids. The legal guardian manages these accounts until their legal adulthood. The custodial account holds cash, real estate, stocks, bonds, and mutual funds.
The Uniform Transfers to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) are the two custodial accounts available to parents to save for their kids. While UGMA only holds cash and securities, UTMA can consist of any assets.
3. 529 College Savings Account
It is a tax-advantaged savings account designed for kids' educational expenses. The plan has been around since 1996 and is documented in Internal Revenue Code 529. US residents can open up a 529 college fund.
Contributions to the 529 college savings account are not federal tax deductible items. However, the qualified education expense deductions are tax-free. Depending on your State, you might get a State tax deduction. There are wide selections of educational expenses, from college expenses and K-12 tuition to student loan repayment, which the 529 plan money can cover tax-free.
Unlike custodial accounts under UTMA and UGMA, the 529 college savings funds do not automatically go to the beneficiaries after a certain age. It stays with the account holder giving them control over its intended use.
4. Roth IRA
The Roth version of the Individual Retirement Account (IRA) is an after-tax investment account for retirement. You can open retirement savings account for your kids. Your kids are liable for taxes, but it grows tax-free. And as long as they don't withdraw it before retirement, there is no penalty.
The retirement account helps your kid's fund grow over time. The funds within the Roth IRA account are highly flexible and can provide a safety cushion during financial troubles. Although you must pay taxes and penalties, your kids stay covered during tough times. Roth IRA can pay for kids' college education with no penalty. In addition, if they've met the 5-year holding period, they can withdraw contributions without taxes and penalties.
5. Trust Fund
A trust fund is not only for wealthy families. Although it is relatively expensive to create a trust fund, you should not neglect the benefits of a trust fund to protect your loved ones.
The trust fund is a legal entity that an Estate Planning attorney creates to hold money, Real Estate, or any other assets. The trust documents will detail who will manage the assets and how they get distributed.
Trust can be one of the best estate planning strategies that provide optimal benefits to your kids when you die. It helps protect assets, minimize tax liabilities and safeguard your child's financial future.
6. Health Savings Account
Health Savings Account (HSA) is tax-advantaged personal savings account to cover qualified medical expenses. HSA is available to everyone under a High Deductible Health Plan (HDHP).
For 2022, the minimum deductible for HDHP is $1,400 for individuals and $2,800 for a family. Your contribution is limited to $3,650 for individuals and $7,300 for the family.
The qualified medical expenses include copays, deductibles, coinsurance, and other medical costs. You'll spend tax-free dollars while covering health care expenses with HSA. You can invest in stocks, mutual funds, and bonds, depending on where you open your HSA. It stays with you when you change jobs.
7. Online Savings Account
An online savings account is similar to the one you open at brick-and-mortar banks but without a physical location transaction. All the transactions like deposits (direct or checks), transfers, or withdrawals occur electronically.
Online banks or internet banks offer higher interest rates than traditional banks. Most online banks offer savings accounts with no maintenance fee and minimum balance. Opening an account is simple, and you can open as many accounts as you like.
You can set up a Federal Deposit Insurance Corporation (FDIC) insured online savings account for your kids. Online savings accounts provide a simple solution to saving money for a kid's future with no early withdrawal penalty and easy access to the account.
8. Flexible Savings Account (FSA)
A Flexible Savings Account (FSA) or Flexible Health Savings Account (FHSA) is tax-advantaged savings accounts similar to HSA but with some restrictions. The most significant difference is that funds will expire in a year.
You'll sign up for FSA during the enrollment period. You'll choose the amount you want to contribute to your FSA account, which will be an automatic paycheck deduction. After signup, you'll receive a debit card that you can use to pay for medical expenses.
FSA covers most healthcare expenses, and you should review the plan website to check for any specific costs.
9. Traditional Brokerage Account
If you want to set money aside for your kid's future, you can open up a traditional brokerage account and transfer money regularly. You can pick a few low-risk mutual funds to help your funds grow.
Consistency is the key to any long-term investment. With so many mobile investment applications to choose from, a scheduled investment is easy. All you have to do is set it and forget it.
With a traditional brokerage account, you've complete control over your account. There is no early withdrawal penalty date you have to remember. You transfer, invest or withdraw funds whenever you want.
The Bottom Line
When preparing your family financially for the future, what you do to save is more important than where you put your money. You can either get creative with tax-advantaged plans, FSA, or HSA or open up an online savings account; the main target is to save for the kids.
The prime focus is making sure they and you will not have to struggle for basic needs and a better future. You can start with any method to save money for the kids and build a cash reserve.
This article was produced and syndicated by Wealth of Geeks.
Ram is an Engineer by day and a personal finance blogger by night. He shares his tips and tricks on earning, saving, and growing money through his blog, Dollar for Cent. He uses his analytical and problem-solving skills to tackle money problems, find deals, and increase wealth. He loves his day job but believes our lives should not be location-bound and time-constrained. He documents his financial journey and hopes to reach financial freedom.