The Best Gift for Your Child: Unconventional Yet Essential

When it comes to saving for your child’s future, the array of investment options can be daunting. Custodial Roth IRAs, 529 Plans, Custodial Accounts (UGMA/UTMA), and brokerage accounts each have their own set of rules, benefits, and limitations. Let’s explore these options and the societal pressures that come with them, and then discuss why focusing on your own financial independence might be the most beneficial choice for your family.

Investment Options for Children

1. Custodial Roth IRAs
   • Pros: Tax-advantaged growth, teaches children about investing.
   • Cons: Requires the child to have earned income, complex rules.
2. 529 Plans
   • Pros: Tax-free withdrawals for qualified education expenses, high contribution limits.
   • Cons: 10% penalty plus taxes on non-education withdrawals, restrictions on fund usage.
3. Custodial Accounts (UGMA/UTMA)
   • Pros: No contribution limits, flexibility in fund usage.
   • Cons: Assets transfer to child at legal age (18-25), limited tax benefits.
4. Brokerage Accounts
   • Pros: Broad investment choices.
   • Cons: Age restrictions (usually 18 or older to open), no tax advantages, potential for high fees.

The Pressure to Save

Many parents feel intense pressure to save for their children’s education and future expenses. Articles and societal expectations often emphasize the importance of starting these funds early and contributing regularly. At the end of the day, college is expensive. And, while these are valid points, they ignore the important truth that you must prioritize your own finances first. Neglecting your own financial health is worse for everyone in the end.

The Unconventional Wisdom: Prioritize Your Financial Independence

Instead of succumbing to pressure, consider this alternative approach:

1. Secure Your Financial Future First
   • Build a robust emergency fund. We suggest 10% of your home’s value.
   • Ensure your retirement savings are on track.
2. Grow Your Income
   • Invest in education, certifications, or side hustles.
3. Live Below Your Means
   • Practice delayed gratification and prudent spending. Save 30-35% of your income. It becomes easier to save a higher percentage of your income when you make more money, so #2 and #3 are related.
4. Invest Wisely
   • Take your savings and invest it. Have a consistent strategy to implement. Dollar cost averaging on broad market ETFs or target date funds are great options. The key here is starting. When you start, it may feel like a small sum of money, but there will be a point in time where these investments will start to have a meaningful impact on your net worth.
5. Keep It Simple
   • Avoid overly complicated financial plans to reduce stress.

Personal Insights

• Personal Experience: My wife and I took out full student loans and paid for our education on our own. We view it as part of our secret sauce because we had no other option but to hustle and find a way to pay them off. This experience taught us the value of financial independence.
• Family Dynamics: We’ve seen how family events can sour easily once finances become a topic of conversation. When financial pressures become the focal point of family relationships, the expectation that your stresses are theirs to share is a recipe for estrangement.

Conclusion

While it’s important to consider your child’s future, the best gift you can give them is your own financial stability. By prioritizing your financial independence, you not only ensure a secure environment for your children but also set a strong example of financial responsibility. This balanced approach can provide peace of mind and a solid foundation for your family’s future.

*Image by Freepik