My previous POST talked about the 4 investment vehicles that parents can use to create a solid financial future for their kids. One of the things that's important to DH and I is the ability to create a legacy for our son. Part of that process involves assessing how we spend money and allocating it in areas that will help us win. I decided to lead the charge in securing a financial future for the family but particularly our son. As of today our 21 month old son has a net worth of $23,299.89. While that isn't a lot of money, about $20,151.98 has been put to work in aggressive investments and the remaining amount is in cash which will probably be put to work soon. I'd like to share how that money is invested but I think it's important to highlight how we started saving for him and our spending philosophy.
We received about $1,400 in cash gifts at the baby shower which was used to establish a bank account for him. We used gift cards to buy as much we could in the beginning and cash flowed everything else from our incomes. When LO (Little One) was about 3 months old, I liquidated my secret stash fund and deposited about $2,700 in his account and started contributing $100 every paycheck to his account. This continued for another 12 months. It's normal for many parents to want to buy the best of everything for their child. We received the big gifts like furniture and stroller/car seat but the latter was one of the most expensive options. I now regret that although DH doesn't. We try not to overspend on clothing, shoes and toys but we've definitely made a few silly purchases in the past.
Since starting this financial journey, DH and I have changed our general spending philosophy and have set price parameters for many things. A big area of spending for parents are Kid Birthday Parties. DH and I wanted to do a grand 1st birthday party like most people do and assumed a $1,200 budget was fair. I then thought about how I can create the most value for that $1,200 and decided instead to save it. When LO is 25, I think he'll agree that saving and eventually investing that money was a more worthwhile decision than spending it on a party he'll never remember. So we spent $75 on 2 cakes and other goodies and had 2 parties (one at daycare and one with family and friends) and took photos with the 4 generations of women on my side of the family. Yes, LO still has his Great-Grandma and Great Great-Grandma. I think those are the photos LO will cherish from his first birthday. I don't judge or criticize what other parents choose to do regarding their kid's birthdays, but as for us, his first few birthdays will be spent just like the first.
I discovered a cool way to save small sums of money incrementally, based on our purchases. Qapital is an app that you link to your checking account and it will round up all debited transactions to the nearest $1 or $2 (Rounding Rules). If I choose the Round Up to Nearest $1 rule, and I make a purchase of $1.09, Qapital will withdraw $.91 from my account. If I choose the Round up to Nearest $2 rule and pay a bill for $201.49, Qapital will withdraw $1.51. DH loaded the app on his phone March of 2016, chose the Round up to $2 Rule and by the end of December had $550 in the account. We transferred out $500 to LO's savings account. Between January and today, DH has accumulated another $600 in his Qapital account. I'm a bit slower in accumulating money because I mostly use my credit card for cash back. I've only accumulated $224.62 in the last 12 months. I wouldn't suggest using Qapital as your main savings vehicle, since true saving is only done with great intention, but it is an excellent way to passively save.
Over the Christmas break of 2015, I spent a tremendous amount of time researching 529 Plans and considered other state options but decided the state income deduction on our taxes was too good to pass up. I established LO's 529 account that same week right around him turning 5 months old. My previous post talks about the limited life of a 529 Plan (18 years to save for college) and I wanted as much investment gain as possible. Again, with investing, starting early is the key. Prior to opening the account, DH and I talked about skyrocketing costs of tuition and research indicates that college costs increase 7% annually. According to the College Board, the average cost of private college tuition is $33,480 for the current school year and doesn't include room and board. With these cost levels in mind, we agreed to contribute $500 monthly. I've since realized that once we're debt free, we'll need to increase this amount a bit because the cost of college will still outweigh the investment performance at the current contribution rate.
The first contribution was made January 2016 and I was very leery of investment losses so I selected the Moderate Growth Portfolio which is also a Conservative Age Based Option. This option has an allocation of 50% stock/50% bond. An Aged Based portfolio starts out with more risk and becomes more conservative as the child ages. After educating myself a bit about risk tolerance and investment time horizon, I switched out 60% of the assets to a Growth Stock Index Portfolio (75% Stock/25% Bond Allocation) and the other 40% in an Aggressive Portfolio which has 100% Stock allocation. I decided to move away from the Age Based option because I was willing to take more risk for greater growth wanted more control over re-balancing the portfolio as I see fit. In February after fulling understanding the importance of my investment horizon, I put 100% of the assets in the Aggressive Growth Portfolio. So LO's college money is heavily invested in 100% stock. I will re-balance as needed in the coming years to preserve as much of the principal and gain as possible. So far we've contributed $8,500 and have $1,072.93 in gains alone (gain was realized on $8,000, since contributions for May went in just a couple days ago).
BRINKS SAVINGS ACCOUNT
In April of 2016, I came across a 5% savings account on balances of up to $5,000 and established an account. The idea of 5% interest on $5,000 seemed like a no brainer since there's no risk for the return. Unfortunately, Brinks changed the terms of the account 3 months later and only offers 5% interest on balances up to $1,000. So I withdrew $4,000 and left the $1,000 plus whatever interest I earned. Just a year later the account, now has $1100.29. A $100 isn't a lot but it's certainly more than the $40 interest payment my friend received on her bank balance of $115,000.
LO's savings account grew to about $9,500 and I grew tired of the bank giving almost nothing in interest. So in February 2017, I transferred all the money into an UGMA account I established with Vanguard and invested everything into a 100% stock fund. LO has 19 more years before he can ever touch the money, and my goal is to teach him small money lessons by age 10 so when he grows into adulthood he will continue on the same trajectory. I could've invested the money in my personal account but wanted to leverage the kiddie tax benefits.
There was a period last year when I spent everyday I was heavily reading about investing and I came across a article that talked about how parents can use Roth IRAs to make their kids rids. The idea of creating wealth for a child from a young age really forced me to start thinking how I could get LO to have earned income. For babies the only option for earned income is baby modeling and I certainly don't have the time to attend casting calls in hopes he'll be the next big thing. For the last couple of months, I've been engaged in discussions with someone who owns a company that sells athletic gear and promotional products to use LO's photos on his website (for promotional items like coffee mugs, magnets, mouse pads etc) for a monthly cost of about $200. It looks like we'll have this deal solidified in the next month or two and I'll be free to set up a Roth IRA for him. I'm really excited about this opportunity.
The money that remains in his regular bank account was gifted to LO from Mr. Mindful Dollar when he cancelled a life insurance policy with cash value he had from a few years ago. The cash value was almost $2,300 and he gifted LO $2,000. We seek every opportunity to pad LO's bank account as much as we can. When we're debt free we'll consider where we can allocate more money to continue to build wealth for LO and change our family tree.
Have you started planning your child's financial future?