When should you start saving for your kids

One of the benefits of getting kids involved with saving and investing is that they have so much time on their side. Investments that compound will experience terrific benefits years and decades later. Someone that starts saving for retirement at 30 and wants a million dollars by 65 would need to start with $100,000 (at 7% returns). Someone starting much younger thought could let the rate of return work for them. A fifteen-year-old could have a million dollars at 65 on a $35,000 initial investment (see https://www.bankrate.com/banking/savings/save-million-calculator/ for a calculator on retirement returns)

Before you start saving for your kids, you need to take care of your own needs first. It’s great to help kids save for college but if that means putting your own retirement at risk, it’s probably not the best option. The fact of the matter is kids will have many options for paying for college including scholarships, loans, and earning income with a job. Retirement doesn’t have as many options. Even working longer may not be an option for everyone as health concerns arise.

Since kids have options, it’s important to meet your needs first, then start to contribute to your children’s future needs.

Your priorities mean paying off any high-interest debt first. It also means making sure you have an emergency fund of 6 months of expenses saved up. Finally, it’s fully funding any retirement accounts, such as Roth IRAs and 401k investment plans.

Once those needs are taken care of, then you can help your kids get a head start on their savings. You might start with an allowance. While an allowance might not be the first thing you think of for saving for kids, it’s a great way to give them some practice saving for themselves. For your kids, establish early the money habits they'll need as an adult. That means first saving up an emergency fund before they can spend any of their money. Kids probably won't have a lot of emergencies, that come up, but setting the need for a basic savings first is a good money habit. Then, continue with the other habits they'll need. Require that some of it, maybe 60%, must be saved for future needs. The other 40% can be spent on things they want or sharing as gifts or to charities.

Beyond an allowance, starting a 529 plan to save for college is a great investment vehicle. 529s have a number of tax advantages which make them ideal for saving for a kid's college or technical school expenses. 529 plans are state sponsored, but you don’t need to live in that state to take advantage of them. You can live in New York, invest in Utah’s 529 plan, and your kids can eventually go to school in Florida. The plans do offer different benefits and each state may have different rules and tax advantages, so you’ll need to do a little research. You can read more about 529 plans and tuition deferment plans on the SEC’s website, https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans , or you can start researching different plans https://www.collegesavings.org/529-search-and-comparison/

Other investment options, such as setting up a custodial account, also exist, but they won’t carry the tax benefits of a 529 and will more directly impact any financial aid the child seeks when they go to college because they are in the child’s name, and not the parents name.

Finally, your child can start a retirement account if they have verifiable income already. The IRS requires any income over $400 to be reported with a Schedule C. Even income from mowing lawns or babysitting would count if it’s reported. Your kids will certainly be eligible after they start a job where they receive a W2. Once they report income, then they can start a retirement account, such as a Roth IRA, up to the contribution limits or whatever their earned income was for that year. It’s worth consulting a financial advisor for this, but getting started on retirement early, really lets the years of compounding returns have an impact.

It's unfortunate for kids today, but the most important things they'll need in life, such as a house, a car, and medical care are getting more and more expensive. All of these items are outpacing even inflation. That's going to make it much harder for kids than it was for their parents. Starting savings and investments early is one way to help our kids be successful later in life. It is also a great reason to talk about good money habits so they'll be ready when they are adults.