From A Father

There are a plethora of decisions to make for your baby even before they are born! What prenatal should your partner take, what diets should you and your partner maintain, what sort of neonatal tests can be performed?

This article will describe what financial decisions we chose to do for our child once they were born. These are not things we did for our personal finances but rather our child’s finances.

As a disclaimer, this is in no way finance advice nor am I acting as a financial advisor. This is a story of our choices and hopefully those choices help inform yours!

In a nutshell, this article will discuss 529Cs, Credit Cards, Custodial Accounts, Bonds, CDs, and Stocks!

529C

Let’s start with the 529C account since everyone will undoubtably ask you if you started a college fund for your child. On the outside, they look enticing. Growing money for your future child without Federal Income Tax once withdrawn. Who doesn’t want that?!

Well we didn’t. For us, we decided not to start one, and here’s why. 529C funds MUST be used towards qualifying education stipulations for your child. This could be college tuition, books, online classes, etc. However, there are stipulations written into the policy language that add penalties if your child receives a scholarship towards a school. Penalties include having to pay tax on the money withdrawn as well as a fee for the withdrawal. Additionally, you are assuming your child will use the money for education. What if your child does not want to go to college? Somebody has to go trade schools and become our plumbers, electricians, builders, etc. 529C funds CAN be used for trade schools but the amount of money required is not as must as college and could just as easily have been invested in long-term CDs or Index Funds.

Therefore, we decided to invest in our child’s future in other ways to avoid the 10% penalty ON TOP of paying Federal Tax on the money withdrawn from a 529C for non educational purposes. We do not want to force our child into the decision of going to college for the sake of using the money we put away for them. That would make me feel very shitty. They should do what they want in life and our job as parents is to knock down barriers not create them.

Credit Cards

Credit cards are quintessential to building credit! Why not help your child build credit over the next 18 years?!

Unfortunately, you cannot open a separate account for your newborn. Most companies do have age restrictions on who can open a card. However, there are no age restrictions on adding your child as an authorized user on your Credit Card account. Some companies only require basic information to add someone as an authorized user (no Social Security number needed). For example, this is the case for Chase Bank. SO as soon as they were born I added them to my bank’s credit account and got their card in the mail. Now whenever I swipe their credit card, it will be charged to my account. As long as I keep paying the balance (which I do) they will successfully build good credit over the next 18 years.

In order to remember to use the card I would suggest always purchasing the same thing with their card. For example, groceries or gas. That way it becomes second nature. “Oh I am getting gas, let’s use so-and-so’s card”.

I would not recommend doing this if you have bad credit or are already struggling to pay your credit card. Whatever your credit is will be reflected in their credit.

Custodial Accounts

To sign up for other account types for your child you are going to need to setup a Custodial Account. These accounts act as an umbrella for you and your child. When they come of age (typically 16 to 18 years old) everything can be transferred to their name and it becomes an individual account. Or it can remain a Custodial Account for as long as you want it to.

Some companies, like Fidelity, allow you to create one Custodial Account that holds all the individual (CDs, savings, etc.) accounts within it. This is what we did so that we can setup the CDs, Stocks, and Savings all from one account. It’s easier to manage everything when it is all in one place within the same management system.

Bonds

Bonds are a great gift for children every year! They are a “guaranteed” return on investment as long as you wait the allotted duration. What’s great about them is that anyone can buy them! Grandparents, Aunts and Uncles, you name it! My grandmother would buy us I or EE bonds every year on our birthdays until we were teenagers. Then by our mid-twenties we could cash them all in!

The main difference between I and EE bonds are in the rate of return on your investment.

EE bonds offer a guaranteed return that doubles your investment amount if your child (or you) hold onto the bond for 20 years. For example, if you buy a $1,000 bond, in 20 years it can be cashed in for $2,000.

I bonds offer an initial return rate that is only good for the first 6 months. After that, they can fluctuate (even to 0%). Therefore, there is not a guaranteed return on investment with I Bonds. However, the rates can be much higher than the EE bonds. So it is a trade off of security (EE) versus potential return (I).

CDs

Certificate of Deposits are good if you want an alternative to savings account. They offer A LOT more interest than a traditional savings account, especially since you have plenty of time for it to grow.

The downside to CDs for many investors is that your money is “locked up” such that it isn’t easily liquidated if a more promising venture were to present itself. With a newborn, this is not an issue. They do no need immediate access to any money so you can enroll in 2, 5, 10 year CDs without a concern for access.

You could even build a CD ladder with 18 to 20 years of time to grow! A CD Ladder is buying CDs in increments of 6 months to 1 year that way they are continuously maturing in a cycle so you can optimize the rates the CDs receive over time. It is a similar idea to cost averaging with stocks.

Whatever your strategy, if you are looking for a savings account with high interest rates, CDs may be your golden ticket!

Savings Account

The tried and true method for most people’s money. The most inefficient way to gain wealth. The positive aspect is that you can’t lose what you put in (as long as it is under the 250,000 FDIC Insured limit).

This is an option to put any money from Birthdays or Christmas gifts.

However, my vote is to stick with CDs, Bonds, or Stocks since your newborn has the time to invest.

Stocks

Not traditionally thought of for a newborn, but you can certainly open a custodial brokerage account.

One of the greatest ways to grow money with index funds or mutual funds on the stock market. Something like the S&P 500 can offer (on average) 7 to 10% return on your investment over the long-term. As I keep repeating so it sticks in your head – your newborn has nothing but time!!!

Stick 10,000 in a compound interest calculator for 20 years at a 7% interest rate and you will be amazed at how fast that money can grow ($40,000 for 400% increase!).

As your child gets older it can be a great opportunity to teach them about stocks, index funds, and the market. Unless you really want to actively manage your child’s account, I personally would just invest in Index Funds and let the market grow over the next 20 years of your child’s life.

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Conclusion

All in all, finances may not be at the forefront of your mind in the weeks following your child’s birth. BUT with a little bit of planning and A LOT of time to grow, a small sum can grow to a large asset! Time is money as they say. And with a newborn you got nothing but Decades for the money to grow!

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