How to Make a Baby Savings Plan - Everything You Need to Know | INVESTEDMOM
Having a baby can be exciting for any soon-to-be parent, but caring for a newborn can be overwhelming with all of the diaper changes, bottles to clean, and not to mention the crying. You’ll have a bundle of new responsibilities, and one thing that may be lurking over every parent’s mind is the added financial burden that comes with welcoming a baby.
The current economic state is likely adding more anxiety over the well-being of your family. With costs skyrocketing day by day, managing the financial expenses that your child brings with them can seem like an impossible task.
You may be confused about where to start and how to create a proper budget for your baby, what to save for, or how much to save.
Don’t worry, though. I have gathered some of the most important points surrounding the importance of a baby savings plan, how to make one, and the best types of savings plans that will set a successful financial foundation for your little bundle of joy.
Why You Should Make a Baby Savings Plan
We all know that raising a baby is pretty expensive. There are a lot of costs associated with raising a child and many ongoing expenses that you have to consider. Buying diapers or clothes barely scratches the surface. You also have to plan for tuition fees, medical bills, pregnancy costs, and other baby expenses.
According to a 2015 U.S. Department of Agriculture study, you can expect to pay $233,610 on average for raising a child from birth till the age of 17. Compare that with inflation in 2023, and you can estimate the costs to be somewhere around $300,723.
Having a baby savings plan helps you start saving early for your child. By starting to save from an early age, you can ensure the child will have a secure financial future by the time they’re older. As your child grows, your savings will grow with them.
Speaking of growth brings up an interesting question: when it comes to financial planning for your child, should you save or invest?
Should You Save or Invest for Your Baby’s Future?
When it comes to finances for a baby, parents may be confused about whether to save or invest for their child. Knowing the differences between each can help you decide which is better suited for you and lead you to make smarter financial decisions for your child’s future.
Ideally, you should have a savings and investment plan and balance your approach between the two. Saving can help you establish an emergency fund, whereas investing can provide you with better financial returns in the long run. But what are the differences between investing and saving?
Differences Between Saving or Investing for a Baby
Goals
The goals for each financial management technique are different. When saving, the goal is typically to save money for making purchases or emergencies. With investing, your main goal would be to gain higher financial returns from your initial investment.
So, in comparison to saving, where your main goal is to save your money, with an investment account, your main goal is to grow your money.
Risks & Returns
Saving is as simple as it sounds. All you have to do is set aside a certain amount of money every day, week, or month and let it accumulate over time. Since that money will always be there (unless you withdraw it), creating a baby savings plan is relatively little to no risk.
On the other hand, investing your money carries a level of risk based on the type of investment and the amount you’ll be investing. When you invest your money, there’s always a chance you might lose it - it all depends on your investing type. On the other hand, there’s always a chance you might have a high return on your investment.
Liquidity
Liquidity refers to how easily and effectively a certain asset can be turned into cash at hand. Savings carry higher liquidity as they can easily and quickly be extracted into a ready form of cash. Investments, however, aren’t as liquid as you may have to sell your assets at lower prices if you want to convert them into ready cash quickly.
Types of Baby Savings Plans You Can Opt Into for Your Child’s Future
You might be wondering whether you can simply open up a savings account and start saving for your child’s future, and while that might be possible, it isn’t always the best option for you. Lucky for you, I have everything you need to know and can help you determine the best savings plans.
You can choose from various saving plans, and depending on your situation, goals, and preferences, you can find the one that works best.
Many banks allow parents to open an account for their children - one they can keep until they reach age 21. Some banks restrict opening accounts to the age limit of 15 or 18, so you’ll need to find the one that suits your timeline.
Also, banks typically encourage saving from a younger age, so child accounts usually give out a higher interest rate than adult accounts. The best account would be the one that grants the highest returns; definitely keep that in mind as you explore your options.
Finally, you need to think about ownership. Your newborn baby’s not going to be the one to deposit money into the bank account. For that reason, a youth savings account would require an adult to register as a custodian who would have full control of the account and be responsible for the assets. Then, as the child gets older, you could transfer control or opt for joint ownership of the account.
Now that we know the basics about choosing a savings plan, you can explore your options.
There are many types of savings accounts you can open, but I recommend really researching the following types of accounts:
529 Plan
Coverdell Education Savings Account (ESA)
UGMA Custodial Account
Let’s explore them in more detail.
529 plan
529 plans are financial accounts that provide tax benefits and are intended to help with your child's educational costs. The 529 savings plan is the most common, and while it allows you significant control over your contributions, there are gift tax implications if you exceed certain contribution limits.
Pros
Tax advantages
Flexibility
Low Maintenance
Cons
Earnings can only be used for educational expenses
Lack of control over how your money is invested
Management fees apply
How to Open a 529 Savings Account
1) Choosing the right plan for you
To set up a 529 plan, start by selecting a plan that aligns with your needs. Given the different choices, this can seem overwhelming, but don’t worry, I can help break down those options for you.
Investigating the 529 savings plans available in various states is a good starting point. Remember that your child isn't restricted to attending a college in the state where the 529 plan is opened; the funds can be used for any accredited college, so there's no need to worry about your money being tied to a specific institution.
That said, opting for a plan from your own state may offer additional advantages, such as extra tax incentives.
Next, determine which kind of 529 account suits your situation. You have two primary choices:
Prepaid Tuition Plan: Pay tuition ahead of time for specific colleges
Savings Plan: Invest college savings in funds
2) File a 529 application for your account
After deciding on the type of account you want, the next step is to complete an enrollment application for your chosen plan. You can typically find the application form on the website of the specific 529 plan you're interested in.
The form will ask for various personal details, including the names of the account owner and beneficiary's names and additional information for each person involved, such as Social Security numbers and birth dates.
Be mindful that some financial institutions may impose a fee for processing your application. Once this fee is paid, your application will be successfully submitted.
3) Add funds to your account
Usually, initiating a 529 savings plan involves making an initial investment to activate your account. After that, I recommend that you deposit a substantial sum to maximize long-term returns.
For added convenience, many 529 plans offer the option to establish automatic contributions, which ensure that you consistently fund the account.
Hopefully, explaining these steps helps you better understand how to set up a 529 plan. Now, let’s discuss the remaining two options for a baby savings plan.
Coverdell Education Savings Account (ESA)
A Coverdell Education Savings Account (ESA) functions similarly to a 529 savings plan, specifically geared towards educational savings. Like a 529, it offers tax-free withdrawals for qualified education expenses.
Additionally, a Coverdell ESA grants you more control over your investment choices, allowing you to select from various options such as stocks, bonds, and mutual funds. If you already enjoy investing, this might be the perfect choice for you.
Pros
Tax-free withdrawals federally on qualified education expenses
Higher control over how the money is invested
Change the beneficiary without a penalty
Cons
Limits yearly contributions to only $2,000 per year
You can only contribute until the child reaches 18, and all funds need to be spent before they turn 30
If you have an annual modified adjusted gross income of more than $110,000 (in the case of individual account) or $220,000 (in the case of joint accounts), you aren’t eligible to apply
UGMA Custodial Account
A UGMA (Uniform Gifts to Minors Act) Custodial Account is essentially a standard savings account with the unique feature that the child owns it. Full ownership automatically transfers to the child when they reach the age of either 18 or 21, depending on the account terms.
This type of account provides a way for minors to own assets like cash, securities, and real estate before they reach the age of majority. However, you need to understand that once ownership is transferred, the young adult is free to use the assets as they see fit, which may or may not align with the original intent of the savings.
Pros
No restrictions on spending
Tax Benefits
Cons
Your child will get complete ownership of the account once they’re in adulthood, which removes your involvement in financial decisions
Taxed after the initial investment amount
Your child might not get as much financial aid in college as funds in this account are counted as assets
Conclusion
Welcoming a baby is a joyous occasion for any parent, although it's well-known that children also bring added financial responsibilities. Establishing a savings plan for your baby can be an excellent strategy to safeguard their financial well-being as they grow into adulthood.
I hope that the options I have provided you for setting up a savings account for your child, such as 529 plans, Coverdell ESAs, or custodial accounts, provide guidance as you prepare for your bundle of joy. Whichever route you choose, evaluating your current financial circumstances, objectives, and preferences is crucial to selecting the most suitable plan for your child's future.
If you’re looking to take providing financial aid to your child a step further, investing in your child is a great option. Check out this article on the 8 Best Kids Investing Apps.
Interested in diving deeper into crafting a robust baby savings strategy and consistently hitting your savings targets? Schedule a one-on-one consultation with me at Invested Mom, and I'll provide all the guidance you need to set your young prodigy on the right financial path.
Meet the Author:
Inge was born and raised in Cape Town, South Africa, and moved to Canada in 2010 looking for a better life. She always had an entrepreneurial spirit and started her first side hustle when she was 9 years old – selling fudge at school during lunch breaks.
It wasn’t until much later that she realized that saving isn’t enough to get ahead. She was always very interested in real estate, but saving up for a down payment was grueling and slow, and the demands of life kept getting in the way.
She started investing in herself and upgrading her skills while learning how to invest. She quickly became debt free and compounded her money at a staggering rate.
It wasn’t until she became a coach that she realized how significant an impact she can make in people’s lives by sharing her journey, learnings, and processes.
So here she is, advocating for everyone who is invested and wants to build their wealth, especially the mommas!