Welcoming a baby comes with a slew of new financial responsibilities that can be overwhelming for many parents. Cary Carbonaro, certified financial planner, joined ‘Stretching Your Dollar’ to provide a few tips to help you prepare for your child’s future monetary needs.
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One of the most precious moments in life is welcoming a new baby into the world. With that joy does come the responsibility of ensuring a secure financial future for your little one. So from starting an education fund to investing in growth assets, even considering life insurance, we’re here to provide you with some helpful tips for this important journey. And joining me now is Cary Carbonaro, a Certified Financial Planner, on how to prepare for your child’s future. Also the author of the great book “The Money Queen’s Guide,” Cary. Thank you. You’re welcome. Ok, so let’s start with the dos. How should people be preparing financially to welcome a child into the world? Yes. So my favorite thing is a 529 plan, and a 529 plan is how you can save and have tax-free growth for your child’s education. And there are two different types of plans. You can have a prepaid plan where you go directly to the state and pay now, and it covers the rest of the life of the plan. The other one, which is more common, is the investment plan where you save during the child’s life. So when they turn 18, they can choose which school to go to. That one is actually a more popular plan. It is a more popular plan. But you think the first one is better. No, I think they’re both good. It just depends because when you do the 529 prepaid, you have to pick the state you’re going to. Most people don’t know unless they’re staying in-state. That’s why the investment plan is more popular. Ok. Good to know. What are other ways to secure the financial future of your child? Yes. My favorite one is to get a Roth IRA for a child, which is an amazing idea because you’re saving at a very young age for their future retirement. You can put money away now, and it grows tax-free forever, but the child has to have earned income. For example, if I’m self-employed, I could pay my child up to $12,000 a year tax-free and put it in a Roth. Let’s say $6,500 a year goes into that Roth. Now I’m setting them up for their future because they have 50-60 years until retirement. So investing in the stock market is the best way to outpace inflation and make your money grow over time. Investing in stocks yields growth over time, unlike cash or bonds. With a child’s long time frame, aggressive investing is key. What about life insurance? Such a good question. If something happens to you and you had an untimely passing, what would happen to your child? Protect them with life insurance. Get a level term period for a set amount of time. It’s much cheaper than renewable term, which starts low and rises over time. What about a trust? How important is that when securing your child’s financial future? A trust can protect the child’s finances if fully funding a 529. You can front load gifting for a 529, putting in 5 years up front. Trusts are more for wealthier individuals, ensuring health, education, and maintenance if something happens to parents. So, what are some things to avoid? Don’t keep money in cash or bonds; aggressive stocks yield better results over time. Also, don’t underestimate how much life insurance you need. People often underestimate their needs. Don’t solely rely on government bonds; they’re safe but may not keep up with inflation. Mutual funds or ETFs in stocks may be better. Thank you, Cary Carbonaro, Certified Financial Planner and author of “The Money Queen’s Guide.”