How to Secure Your Child’s Financial Future

How to Secure Your Child’s Financial Future

Raising a child is no small fête, especially with the costs increasing as children age. A 2020 survey by Oneclass indicated that 56% of college students could no longer afford their tuition fees. Additionally, a separate report indicated that millennials earn 20% less than baby boomers did at their age.

Given the current state of affairs, financial planning is pivotal in ensuring the financial safety of the young ones. Planning for your child’s financial future in advance enables you to guide them through the unpredictable journey of life.

What is Financial Security, and Why is it Important?

Financial security means different things to different people. For most people, it means having enough financial assets to cover your expenses, emergencies, and retirement without worrying about it running out.

People could be putting their children’s financial security at risk by not considering how they’d cope with unexpected job loss or if their situation changed. Here are some of the benefits of securing your child’s financial future.

• It can provide peace of mind
• It can be a safety net when things don’t go as planned
• It can give you time to get back on your feet
• It can allow you to focus more on creating good memories

How to achieve Financial Security for Your Child

The following are ways to ensure your child’s financial future is safeguarded.

1.   Pay your Debts or Consolidate Your Loans

Starting a family when you’re already neck-deep in debt can feel challenging. To avoid this, you can accelerate the repayment of any auto loans, mortgages, and credit card debts you have. Paying down these debts sooner rather than later fast-tracks your family’s journey to financial freedom.

A great way of paying your creditors faster is debt consolidation. It involves merging several debts into one account, which allows you to make a single payment each month to cover all your debts.

2.   Teach your Kids Financial Literacy

From experience, many adults have had to learn the harsh consequences of poor money management. Sam X, co-creator of Sammy Rabbit, had this to say about financial literacy, “Without a working knowledge of money, it is extraordinarily difficult to do well in life.”

Once your kids are old enough to know they shouldn’t be sticking pennies in their mouths, this could be a great starting point to teach them about money matters. You can explain to them what it is, then practically show them how money is used. Having kids earn their allowance through chores, helping them open a savings account, and including them in family discussions about finances can help build their financial knowledge.

3.   Invest As Early As Possible

Many parents often waste years before they start a savings and investment plan for their children. However, you waste valuable time if you wait until your kids reach 8 to 10 years old before saving for their future.

The sooner you can invest in your kid’s future, the better. Explaining the varieties of investments to your child may seem challenging, but a good starting point would be finding games, like a stock market simulator game, for example, and leading them through it.

After they understand the basics of investing, you can help them get started by guiding them through a stock app for beginners, for example. They can benefit from investments by watching their money grow while making minimal contributions. While doing this, don’t forget to explain to them the risks involved in stock investment.

4.   The College 529 Plan or Coverdell ESA

Saving for college is one of the most pressing financial concerns parents face these days. When it comes to college savings, you generally have two choices: a 529 plan and a Coverdell ESA. Although both offer tax advantages, there are key differences in how the plans work.

A Coverdell Education Savings Account (ESA) allows the account owner to make tax-free investments and tax-free withdrawals for education expenses. It can be used to cover a larger set of expenses throughout the entirety of a child beneficiary’s education career. Overall, Coverdell has a lower annual contribution rate ($2,000). Investments may be made until the beneficiary turns 18 and must be distributed before he/she turns 30 except for special needs children.

If your focus is solely saving for college, the 529 plan can be a great option thanks to the tax benefits they offer. While most of them don’t have an annual limit, lifetime contributions are normally capped at $300,000. Ultimately, no specific plan can be deemed “better” than the other, as the pros and cons depend on matters like socio-economic status and personal priority.

5.   Purchase Insurance

Insurance primarily guards against risks. Parents often face many risks which can be in the form of accidents, illness, sudden job loss, property damage, and sometimes death. Without a plan, you might have to go into debt or use funds set aside for other financial goals in the event of a financial disaster. Suitable comprehensive insurance coverage against such severe setbacks is essential.

Good financial planning is incomplete unless your children are protected under a good health and life insurance plan. While purchasing life insurance for your family, ensure you select a premium waiver that will provide financial backing to your family in case of unfortunate events.

6.   Set Up an Updated Will

According to a wills and estate planning study, in 2020, only 16% of Americans ages 18-35 said they had a will or another estate planning document. With the onset of the Covid-19 pandemic, this number rose by nine points.

Creating a will is imperative when it comes to protecting your child’s financial future. You can also designate a guardian to take care of your children and name a property guardian to manage your estate. Drafting a will doesn’t have to be complicated, an estate planning attorney can help you draft a simple will for as little as $150.

7.   Model Good Financial Behavior

If you want your children to develop good saving and spending habits, they need to see you making smart spending and saving choices. You can teach your children the value of saving; give them an awareness of how much things cost and how to make informed financial decisions that will benefit them down the road.

Educating your children about personal finance is a process that can take time. Nevertheless, if you put in the effort, and continuously communicate a clear message about money, you can instill good habits that will serve your children.

Final Word

Understandably, any parent will want their children, to be as secure as possible in the future and to give them the best that life has to offer. However, financial security for your children doesn’t just come by wishing. Through careful planning, you can secure your child’s financial future, which can give them the advantage they need to succeed in life. As with most financial issues, the earlier you start, the better.

Guest Article. Contains sponsored links.