Dear Carrie, We just had our first baby and relatives have given us $1,000 in cash and checks for him. What's the best way to invest it? We thought about a 529 but aren't financially able to make monthly contributions right now. What are some other options? — A Reader
Dear Reader, Congratulations all around — to you on the birth of your first child and to him because he has parents who are already thinking about his financial future. There are several possible options for investing this money, and no matter what you choose to do, $1,000 is a good start. And the sooner you get it growing, the better. Interestingly, my last column was on the power of compound interest. You might check that out for even more affirmation on your decision to get this money working.
When it comes to deciding where to put the money, if a giver has indicated a preference, I'd start by honoring that wish. And even if they haven't, you might check in with your relatives just to make sure they don't have specific expectations for their gift.
If how you use the money for your child is totally up to you, look at it as you would any investing decision and begin by thinking about goals and timelines. As I'm sure you're well aware, expenses for your child begin on day one and continue for many years. So here are some questions to help you decide how this money can best be used, whether now or in the future.
From daily expenses like diapers and clothes to big-ticket items like furniture and childcare to additional medical costs, a new baby can strain your budget. So first be realistic about how you'll cover short-term expenses. If you think the $1,000 will be needed in the near future, I suggest a low-cost, high-yield savings account that's easily accessible. Right now interest rates on online savings accounts are climbing (some as high as 2.25 percent as of this writing), so you might start there.
As a general rule, it's best to keep money that you might need in the next two to five years out of the stock market. Even though rates of return are potentially higher for stocks than for savings accounts, with a short timeline, you don't want to risk losing money you could need fairly soon.
While these types of costs may seem far in the future, any parent will tell you how quickly they creep up on you! So if you think you're covered short-term, you might well think of this initial $1,000 as a "down payment" on the extras that you otherwise wouldn't be able to afford. Again, a high-yield savings account is one option, as would be a CD that will mature at the time you expect to use the funds. However, if you have a longer timeline, you could also consider a custodial brokerage account.
With a brokerage account, you could invest in a broad-based stock mutual fund or ETF. That would give you the potential for more growth with the flexibility to access the funds when you need them. And by reinvesting the dividends, your investments can continue to grow. Of course, you always have to keep in mind that the risk with the stock market is that your investment might decline in value due to changing market conditions.
Also, in any custodial account, the money must be used for the benefit of the child apart from normal, everyday expenses, so it can be a good choice to handle those extras. But one caveat is that money in a custodial account becomes the property of the child at the age of majority (the age a person legally becomes an adult, which varies by state but is usually 18). That's a long way off, but still important to consider.
With the eye-popping projected costs of college in 18 years (anywhere from over $100,000 for a 4-year public university to close to $300,000 for a private university), every new parent should consider saving for education as soon as possible.
You mention a 529 plan, and I believe that's one of the best choices if you want to earmark that $1,000 for long-term education savings. The tax advantages can increase significantly the longer you invest and an account is easy to set up. Minimum initial investments can be as low as $25. Also keep in mind that you're not limited to your own state plan.
One more important thing: In the midst of all your new financial responsibilities, don't ignore your retirement fund. As counterintuitive as it may seem, your own financial future should still be a top priority. It won't jeopardize your kids' well-being now. And knowing that you're financially secure may actually give them greater peace of mind when they're grown up and on their own.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at askcarrie@schwab.com The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Investors should consider, before investing in a 529 plan, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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