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 walls.

What’s left?

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 uses.

“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 crisis.

•  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 windfall.

• 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.