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Financial Planning for Your Child’s Future

— December 11, 2023

Life is full of twists and turns, and you want to ensure your financial plan is flexible. An advisor can help you do this.

Financial planning is like planting a tree. The sooner you start, the more time it takes to grow; the same holds when planning for your child’s future. If you start saving $20 a week from when your child is born, you’ll have over $18,000 when they turn 18. If you invest that into an account with an annual return of 5%, you’ll have almost $30,000.

This can make a massive difference to your child’s life as they reach adulthood, contributing to things like higher education, moving house, and other expenses. Let’s explore setting financial goals for your child and how to teach them to be financially responsible.

Estimating the future costs of education 

One of the most critical aspects of financial planning for your child’s future is estimating the future costs of education. This involves predicting a range of variables that will fluctuate over time.

In the United States, for example, average tuition fees at public four-year colleges increased 9.24% from 2010 to 2022. In Australia, University students will be hit with an average 7.8% increase in tuition fees in 2024.

As such, when you’re estimating these costs for future education, you need to consider the following:

1.     Inflation, which can significantly impact the future cost of education.

2.     The type of institution — whether public or private. Private institutions typically have higher tuition fees than their public counterparts.

3.     The course: courses in medicine or engineering, for instance, may cost more than humanities or social science courses.

4.     Additional expenses include accommodation, textbooks, transportation, and other living costs.

Creating a realistic estimate will make determining how much you need to save to meet these future costs easier.

Setting financial goals

Table with laptop, plant, pen, notepads, and a sign reading “Finance: Funding, Saving, Benefit.” Image by Rawpixel, via
Table with laptop, plant, pen, notepads, and a sign reading “Finance: Funding, Saving, Benefit.” Image by Rawpixel, via

Clear, well-defined financial goals are essential, but it’s not just about setting goals for your child. You also need to make sure you set your own financial targets. This could include building a retirement nest egg, paying off a mortgage, building home equity, or saving for a dream vacation. Each of these goals requires a different saving strategy and timeline.

Once you have set the goals, it’s essential to revisit and revise them as your circumstances change. For example, if you get a raise at work or if there’s a new addition to the family, these life changes should prompt a review of your financial goals.

Choosing the right savings tools

Children’s savings accounts are pretty straightforward. They function like regular savings accounts but are designed specifically for minors. These accounts often come with competitive interest rates and have the added benefit of teaching your child about savings early on.

In the US, 529 college savings or prepaid tuition plans are education-specific savings tools. They offer tax advantages when the funds are used for qualified education expenses. A 529 college savings plan allows you to save money in an investment account, while a prepaid tuition plan lets you prepay future tuition at today’s rates.

Roth IRAs, typically used for retirement savings, can also be used for education savings. The contributions are made after tax, but the earnings and withdrawals are tax-free if certain conditions are met.

Alternatively, health savings accounts can also be used as a retirement tool. They are triple tax-advantaged — contributions, earnings, and withdrawals for qualified medical expenses are all tax-free.

Each tool has advantages and tax implications, so you must analyze your financial goals, risk tolerance, and circumstances to choose the right one.

Start saving early

Starting to save early is crucial when planning for your child’s future. Why is it so important? Two words: compound interest.

Compound interest is earned on the initial principal and the accumulated interest from previous periods. In simpler terms, it’s “interest on interest.” This means even small amounts saved regularly can grow into substantial sums over time.

Starting to save early gives your money more time to grow. Each year you delay saving could cost you significantly in the long run. It also means you can save less each month to reach your financial goals due to the additional growth from compounding.

Starting early can also significantly reduce the financial burden later on. Instead of scrambling to gather funds when your child is ready for college or other big life events, you’ll have a robust financial cushion.

Teaching your child about money

You want your child to understand the value of money and the principles of saving, budgeting, and investing.

Start by setting an example with your money habits. Children learn by observing their parents, so demonstrating prudent financial behavior can go a long way. Show them that stuff costs money and involve them in simple financial decisions, like grocery shopping within a budget.

As they grow older, gradually introduce more complex concepts. For instance, discuss the difference between needs and wants or explore ways to earn money. If you’re comfortable doing so, include them in family financial meetings where you pay bills or discuss large purchases.

Should you get help from a financial advisor?

Future financial planning isn’t easy, but that’s where a financial advisor comes in. An advisor can provide the guidance you need to suit your specific goals. They can help you understand the various savings tools, tax implications, investment strategies, risk management, and estate planning. They can also help you stay on track. 

Life is full of twists and turns, and you want to ensure your financial plan is flexible. An advisor can help you do this. They can also help you review your financial plan regularly to keep it running smoothly with your lifestyle.

Financial planning for children is manageable and rewarding with the right approach, quality tools, and great advice. Start early, set clear goals, and seek professional advice if needed. Remember, it’s not just about saving — it’s about creating a comprehensive plan that can adapt to life’s ups and downs.

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