Stretching Your Dollar: How to Prepare for Your Child's Financial Future

<div class="block">Welcoming a baby comes with slew of new financial responsibilities that can be overwhelming for many parents. Cary Carbonaro, certified financial planner, joined &#39;Stretching Your Dollar&#39; to provide a few tips to help you prepare for your child&#39;s future monetary needs. </div>

Stretching Your Dollar

One of the most precious moments in life is welcoming a new baby into the world. With that joy does come the responsibility of ensuring a secure financial future for your little one. So from starting an education fund to investing in growth assets, even considering life insurance, we're going to provide you with some helpful tips for this important journey. And joining me now is Carrie Carbonaro Certified Financial Planner on how to prepare for your child's future. Also the author of this great book, The Money Queen's Guide, Carrie. Thank you. You're welcome. Ok, so let's start with the dos. How should people be preparing financially to welcome a child into the world? Yes. So my favorite thing is a 529 plan and a 5 29 plan is how you can save and have tax free growth for your child, for education. And there's two different types of plans. You can have a prepaid plan where you go directly to the state and you get you pay now and then and then it covers for the rest of the life of the plan. So you don't even have to worry about inflation. The other one, which is actually more common is the investment plan where you put money in and then you save during, for the life of the child. So that when you're at 18, you can choose which school to go to. And that one is actually a more popular plan. It is a more popular plan. But you think the first one actually is better. No, I think they're both good. It just depends because when you do the 529 prepaid, you have to pick the state that you're going to go to. And so most people don't know exactly unless they know they're going to stay in state. So that's why the, the investment plan is more popular. Ok. Good to know what are other ways to secure the financial future of your child? Yes. So my favorite one is to get a Roth Ira for a child, which is an absolutely amazing idea because you're now saving at a very young age for a child, for their future retirement. And you can put this money away now and grows tax free forever, but the child has to have earned income. So, for example, if I'm self employed, I could pay my child up to $12,000 a year. Tax free. Don't even have to pay any taxes on it. And also put it in a, in a Roth, let's say 6500 a year goes into that Roth. And then that money is now, I am pretty much setting them up for their future because you have 50 60 years, maybe even 70 years until the child is retiring. So obviously investing is something that you're very keen on to help the financial future of Children. Yes. So I believe investing in the stock market is the best way to outpace inflation and to really make your money grow over time. You know, if you look at a nice I chart, you can see, you know, investing in stocks is going to yield you a certain amount of growth over time. And if you did, let's say a more safe investment vehicle, like a like a cash or a bond, you're going to make less over time. And because you have such a long time frame with a child, you should be investing aggressively for the long term because you've got time on your side. Yeah. What about life insurance? Such a such a good question. Yes, because think about it, if you're responsible for this child and something happens to you and you had an untimely passing, what would happen to your child. And so the best way to ensure that is to protect them with life insurance, which is relatively inexpensive if you're younger. So what I tell people, I actually just had this conversation with my son and daughter in law who are expecting a baby. And I said, thank you. And I said, what can you do they said, how much life insurance do we need? What type should we get? And I said first, you need to make sure that you're replacing your income. So let's say died today and you're 30 you have to replace your income from 30 to 65. So you have to have your, take your income times 35 years and that's the number you need for life insurance. So that's gonna be expensive. So the best way to do it is what's called a level term period where it's the same amount of money for the whole entire time. So you could get like a 30 year level term or a 20 year level term or a 35 year level term. And that's so much cheaper than renewable term, which looks cheaper in the beginning because it's super low in the, in the beginning and then it starts to rise over time. So you'll be paying much more for that one. What about a trust? How important is that when securing your child's financial future? So I like to tell people that a trust is kind of like, do you ever hear of the trust fund babies? Right. And so I always say it's kind of a rich people problem, but that's ok because we have to take care of every thing, right? So if you have already fully funded your 529 which by the way you can front load, do you know what front loading is walk our view. Ok. So front loading is you're allowed to gift 17,000 per person per year. Now, for a 529 you can put in five years right up front. So let's say the baby is born tomorrow. I can put five years of gifting up front. So if it's a couple, two people, we can put 170,000 dollars into that 529 account up front and hopefully be finished with college. That's it. It's done. You can go anywhere you want by the time the child is 18 years old. So what happens with the trust is if I fully funded that 5 29 up front, I can't get into the trust for the next five years after that, I can think about putting a setting up a trust for my child, which will then make sure they have health education maintenance if something happened to, to me. Yeah. So what are some things that people should avoid? What are some don't when it comes to securing your child's financial future? Sure. So I would say don't keep the money in cash or bonds because it's safe or it feels safe. I think, you know, putting it in more aggressive stocks because you've got the long time frame is the better way to go. Also don't underestimate how much money you need for life insurance because most people think that they only need like most people come up with like a million dollars and say, ok, I'm gonna have a million dollars, but it's really depends on your lifestyle, your income, how your age, there's so many things involved with that. So I think a lot of people underestimate that. Ok, very good. Um, obviously we talked a little bit about a retirement account here. Government bonds, I'm guessing you're probably gonna say no, a government bond when it comes to securing the financial future. So government bonds are great and safe, super safe. But again, you're not going to make as much money over time. You may not keep pace with inflation. They're still good vehicles, but I think you could do better with a mutual fund or an ETF in stocks. Ok, Carrie Carbonaro Certified Financial Planner with our book here on set. Carry's book, I should say, Carrie. Thank you. Thank you.