Bank On It, Baby
With preparation, a secure financial future for your
child is within reach
By Lynn N. Duke
The nursery is perfectly appointed from the Robeez booties
and organic crib blanket in the dresser to the Alexander Henry paint on the
While many parents spend hours planning their baby’s new
nest, too few consider their children’s nest egg beyond, perhaps, taking an
initial stab at establishing a college fund.
In order to really give their children a solid financial
grip on the future, there are several aspects of their own financial lives that
parents should make sure are in order.
“Try to do everything along the way to secure your own
financial future, not with an eye toward leaving your children a windfall, but
so that you can help them along the way - their first car, college,
professional school or whatever their needs may be,” said Theodore E. Hughes,
Michigan assistant attorney general for law, retired, and co-author of several
books on estate and financial planning.
Estate planning, proper insurance coverage and a solid
retirement plan will aid your children’s financial stability in the long term
almost as much as it will your own. For parents of children with special needs,
maintaining control over these components is even more critical.
And in showing your children that money is a powerful tool
that can work for you or against you depending on how it’s managed, you may be
providing them with the strongest fiscal tool of all: Respect for money and its
“There’s a saying: Poor people spend their money and save
what’s left. Rich people save their money and spend what’s left,” said Deborah
Fox, founder of the San Diego-based Fox College Funding, LLC. “Money has its
own energy. You need to learn to attract money and to keep money.”
Here are nine steps you can take that will likely translate
into a smoother financial future for your children:
- Medical Insurance – If you don’t have medical coverage at
work, consider buying catastrophic coverage for all members of your
family. Even if you’re saving money, have a retirement and/or college
funds socked away, all it takes is one serious illness or accident to wipe
it all out. Catastrophic coverage, which usually includes a very high
deductible, can shield at least a portion of your nest egg in times of
- Retirement - Securing your financial future can ease your
children’s burden later on, when they’re saving for their own retirement
and your grandchildren’s college education. If you have to choose between
a retirement fund and a college fund, go with retirement. “You can’t
borrow for retirement, like you can for college,” Fox said. Contributions
to IRAs and 401ks should be maximized before other investments or savings
plans are considered, Hughes said.
- Life Insurance – For a minimum investment, limit to term
life insurance can create an immediate nest egg of a $500,000 or $1
million if parents die prematurely, Hughes said.
- Umbrella Policy – This goes beyond the liability limits of
your homeowners and/or motor vehicle coverage. Especially important to
consider if you have a child driving a car titled in your name.
- Disability Insurance – Another hedge against a
catastrophic event that can wipe out any retirement or other funds put
aside. It can be prohibitively expensive depending on several factors
including health and type of employment.
- Estate Planning – More than half of all Americans die
without a will, Hughes said. Without one, the courts decide who takes care
of your minor children, and how your assets are divided up. He recommends
establishing a trust that will limit your children’s access to assets from
your estate until they are at least 21-years-old, and perhaps older.
Without such a stipulation, minors will come into their inheritance when
they turn 18, an age many consider too young to responsibly handle a
- Special needs – Most children with disabilities will need
some type of custodial care throughout their lives. Having assets in
excess of $2,000 can jeopardize this eligibility, so establishing a
special needs trust is important, according to Chris Sullivan, vice
president of special needs financial services group at Merrill Lynch. This
acts as a receptacle for inheritances and gifts, and can be used to
supplement the child’s disability income rather than supplant it. Contact
the Special Needs Alliance, 1.877.572.8472, http://www.specialneedsalliance.com/
for more information and to find an attorney specializing in this area.
- Budget – Establishing a household budget makes it more
likely that you’ll reach your financial goals. And by exposing your
children to the process gradually, they will learn how to manage money.
You’ll help them see where it goes and understand how financial decisions
affect the whole family. Fox recommends a 70-30 split of after-tax income.
Seventy percent of your income goes for monthly expense, while the other
30 is divided into charitable contributions, savings – other than
retirement, and which should be enough to cover at least two months of
household expenses – and capital investment, which she describes as using
the money in any way that allows you to take advantage of our capitalist
society; whether it’s buying something wholesale and selling at retail,
investing in real estate or starting a small business.
- Investment portfolio maintenance – Portfolios should be
reviewed annually for performance and diversification. Investors should
also be diligent about updating their stop loss orders, which sets the
price (below current market value) at which a security should be sold.
This protects profits already made, and should be updated to reflect a
stock’s increased value, Fox said.