Raising a child is expensive.
For parents, these early years are crucial. While time may pass in a blur of diaper changes and sleep deprivation, the first 24 months are an opportunity to set out a financial action plan for your child.
Why? Well, raising a child is expensive. From our experience, many young parents know this instinctively, but they’re unsure of the exact investment needed or how to manage the costs over time.
Studies have shown the cost of raising one child from birth to age 18 at between $120,000 (lower income earners on a tight budget) to $600,000 (higher income earners with disposable cash). The average cost of raising two children for an average income earner is between $400,000 and $500,000. That’s a lot of money.
New parents can start with a blank sheet of paper
List the main life stages your child will experience between birth and adulthood. Then think about what your ideal financial goal is for each.
Costs fall into two broad categories. The first are those you’ll incur as your child grows. Will you need childcare? What about private healthcare? Do you want a private or public primary and secondary education? Should you plan for a college education?
The second category deals with investing for children on their behalf for expenses they’ll need as adults. To what degree do you want to help them beyond age 18 or age 21? Will you fund their first car? Do you want to provide a lump sum gift? Will you help them buy their first home?
Don’t worry if you’re not sure. A licensed or appropriately authorized financial adviser will be able to help you determine what’s realistic and what’s not realistic.
Generally, the type of start you give your kids depends on your goals and financial situation. A financial adviser will take these into account when identifying opportunities and strategies. These will form the contents of your financial plan.
This plan may be designed to help you make regular contributions to savings or grow an investment whenever you have spare cash. Your financial plan may use a number of strategies such as a managed fund, a bank account (such as a high interest low fee online saver account) or a portfolio of shares. The course you and your adviser choose will come down to your goals, risk profile and time frame.
Strategies to consider
One possible strategy involves maximizing tax strategies and a 529 plan. If you qualify for a tax deduction you could receive funds to assist you in raising your child. Rather than spending the amount right away, you could consider investing some or all of the Baby Bonus in a fund over time to take advantage of growth assets and compound interest.
Another area to address is insurance for your child. An increasingly popular product is a Children’s health policy. Normally an add-on to a parent’s life insurance policy, it provides a lump sum payment which can be used to fund medical and rehabilitation costs. It can also replace your income while you take the time to care for your child. They are relatively inexpensive, so this form of insurance is worth a look. (On a number of occasions we have been asked to help a client with a strategy to meet escalating costs after their child was involved in an unforseen accident or trauma. Regular hospital visits and appointments with specialists can be expensive so consider making insurance part of your financial plan.)
Don’t forget to revisit your plan regularly
Remember, expenses usually increase as your child grows older. This means you should either revisit your plan at particular points of your child’s development, or implement several plans along the way. Further, think about whether the financial plan for your child is separate to or part of your own wealth accumulation strategy.
If you would like to meet with a Peak Financial Partners adviser to develop a financial plan for your family, please call us at 1-614-542-7242; or send an email firstname.lastname@example.org.