I have several friends who are having babies right now. What an awesome time and experience to go through, but also one that brings up so many complications with finances. Diapers, daycare, sports, braces, cars, college; the list goes on and on and on. So, lets talk some about why you need to start thinking about their finances ASAP and what options you have to get started. No matter how old your kids are, setting them up for financial success cannot be emphasized enough. Afterall, we’re Developing Generational Wealth here!
** The first and most important thing I will tell you, is TO GET YOUR KIDS INVOLVED!!! You probably don’t have to show your newborn their 529 account, but start talking about their (and your) finances with them constantly. Most of us grew up with finances being a “taboo” subject to talk about, DON’T BE THOSE PEOPLE. Explain to them what and why you’re doing what you are every step of the way. **
Let’s get going with one of my favorite quotes. “Compound interest is the most powerful force in the universe.” -Albert Einstein. Do you know how you build Generational Wealth for a newborn? Invest $7,000 into the stock market for them. $7,000 is all it takes to make them a Millionaire by the time they turn 65. Without any additional income from them, over 65 years at 8%, $7,000 turns into over One Million Dollars. But that’s only if you can figure out how to do this yourself. If you pay a financial advisor 1% per year to help you with this, it drops all the way down to less than $600k! Learning how to do this on your own is insanely important. Compound interest may be the most powerful force in the universe, but that knowledge of doing it yourself amplifies that power. Investing can give you power, but knowledge will build you Generational Wealth.
529 Plans: 529 plan’s are specifically made for preparing for qualified educational expenses. 529’s allow you to invest money, let it grow and use that money tax free for eligible expenses. Depending on your state, you can also get a tax deduction for the money that you contribute to your child’s 529 up to a certain limit. This gives you and your child a huge advantage by allowing your to knock some money off of your state income, lets it grow within the markets and then allows them to withdraw it tax free to pay for expenses. But wait, there’s more.
Starting in 2024, the SECURE 2.0 Act has changed the rules on excess funds left in a 529 with certain restrictions. This Schwab article1 explains the changes and how you can roll up to $35k from a 529 into a Roth IRA. The restrictions make the case to contribute, but not excessively over contribute to a 529 account.
Savings accounts: We know what savings accounts are, they are for short term expenses, that’s where Dave tells you to put your emergency fund. KIDS DON’T NEED AN EMERGENCY FUND! When Amanda and I first had kids, I was working at the bank and just starting to dive deep into personal finances. We decided that we would open up savings accounts for both boys. Any money they received went directly into their savings. Savings accounts are good vehicles for money that you are going to be using in the near future, so I’m want to pose the same question that stuck with me, when are your kids going to be using their savings accounts?
It wasn’t until April of 2023 that I realized what a mistake that was. By putting our kid’s money into a savings account, we were taking away the biggest advantage they have on us, TIME. What is my kid going to need his savings account for while they’re under my roof? To buy a car when they’re 16 is the biggest thing I can think of, and even that will vary by family. So, April of last year I said the heck with it and WE started investing it. And I had both my 3 and 6 year old help me with every single step of it while I explained it all to them.
UGTA/UGMA Accounts: We opened up UGTA accounts closed the savings accounts. This is an account owned by the minor that a family member or guardian manages for (should be with) them. The downside to these accounts are that they will hurt you when it comes to financial aid because it is an asset for the child, but the upside is you don’t have to wait until your kid is 18 to invest into the stock market. You get to use their TIME advantage to put their money into the market. The age that the child gains control of the account varies by state, between 18-25 years old. Which brings up another point to mention. If you load this thing up and it does well, you’re child is going to gain full access of it. You (or me) HAVE TO teach them proper personal finance skills to keep them from using it unwisely.
When we made this decision to ditch the savings, they were making 2.5% in their accounts. The S&P 500 is up almost 24% over the last 12 months. These gains won’t happen every year, but the SOONEST my kids will be using this money is going to be 10 years from now. To me, those gains are worth the financial aid risk when they go to college. Inflation in 2023 was 4.1%. My kids were LOSING MONEY by having it sit idle in a savings account with me full knowing that they weren’t going to use it for 10 years. That’s my mistake that hurt my kid’s financial future. Are you making that same mistake?
Moral of the story is to do something, anything to help prepare you kids for a bright future. If you don’t know where to start all you have to do is reach out. If I can’t help you I will absolutely point you in the direction of someone that can. Call, text, email, schedule an appointment. Stop waiting for the world to give you a hand out and take charge of your finances yourself. That is how you Develop Generational Wealth.
Disclosure: Everyone’s situation is different. What me and my family have done is not a recommendation on what you should do.
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