I Just Had My First Baby So I Asked An Expert How To Save For Her Future

This is some next-level adulting.

I just had my first baby (!!), and in addition to keeping another human alive, it turns out I also need to consider her financial future.

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Hello responsibility!

I have to figure out what to do with that $40 her great-aunt gifted her and how (if ever) I'm going to help pay for college someday.

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Right now that $40 is sitting on my desk, and I literally have NO IDEA where to begin when it comes to college, which feels wildly distant from my present reality of diapers and spit-up.

To help me navigate this new world, I interviewed Trina Patel, a fellow new mom and financial advice expert at Albert.

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Patel leaned on her experience in private banking and financial coaching (and what she's picked up as a parent), to help me figure out what I should be doing to set my daughter up for financial success.

For starters, she says new parents should open an account for short-term, child-related expenses.

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I'm not a fan of multiple accounts, but I understand the power of a designated account and automatic transfers, which keep confusion at bay and excuses to a minimum.

"Once your child is born, you’ll want to start setting aside money separately for them," said Patel by email. "This will ensure it’s forced savings and make it simpler to manage their expenses." 

She said in the short term, I should "think about the baby-related expenses you’ll need to pay for in the near future (i.e., childcare, baby gear, and other essential items)."

But, you'll also need to think about long-term costs (e.g., COLLEGE 😬).

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Patel said that for the long term, I "may want to consider education or general savings you’d like to gift to them once they reach a certain age."

I don't plan on sending her to a pricey preschool or private high school, but I do want to help with college (assuming that's a path she wants to take). And it turns out there's an savings account designed for just that. Enter: the 529.

There are a few ways to put aside money for your kid's education — most notably, the 529.

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"The 529 is a college savings account that is exempt from federal (and sometimes state) taxes. It’s designed to help families save for college and education-related costs. The funds can be invested and withdrawn tax-free, as long as they are spent on qualified expenses, such as tuition and fees, room and board, books, supplies," said Patel, who noted that as of January 2018, "Tuition at private elementary and secondary schools is considered an eligible educational expense."

The 529 is great for parents who want to help pay for their kid's education, but Patel warns that "If your child decides not to go to college, you’ll either have to designate another beneficiary or pay a penalty and taxes for noneducational withdrawals." The plan also has fees and more limited investment options.

If a 529 seems too restrictive, Patel recommends checking out a custodial account or a Roth IRA.

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A custodial account is an account that an adult controls for a minor. The money added to the account can't be taken out and goes to the child when they come of age (it depends on the state, but usually age 18 or 21). 

Patel says the other option is a Roth IRA. She explains that you can use these "funds on qualified college expenses without incurring the 10% penalty."

A college fund is great, but you should only start one if you're in a good place financially.

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Saving money for your kid's education is great, but don't add a new expense to your plate until you've got all your personal finances in order.

"Before you contribute to long-term savings goals for your child, make sure you’re financially ready. This means you have your own savings, retirement contributions on track, and no high-interest debt," explains Patel.

If you're ready to set up a long-term, kid-focused savings account or college fund, ask yourself these questions.

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If your own finances are in a good place and you're ready to set up a college or other long-term savings account for your kid, Patel says you should ask yourself the following questions:

1. What is your goal? Are you aiming to save for their entire education, or is your goal to save for part of it?

2. How much time do you have until they’ll need the funds? Are you starting right after they’re born, or are they a little older?

"Once you determine what your end savings goal is, you can then do the math to see how much you’ll need to start putting away. If you’re just getting started, you can begin by contributing a lower amount now and gradually increase it over time," she says.

When your kid gets a little older, be transparent about the cost of college and how much you can afford to help them.

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When your kid gets older, you'll need to be super clear about how much you expect to be able to contribute toward college. If one year of college is $35,000 and you have $20,000 saved, that means you can give them $5,000 a year (assuming it's a four-year school). In this example, you'd need to be clear that they'll need to get loans, scholarships, and grants to cover the remaining $30,000 annually. 

"Have an open conversation about the cost of higher education as soon as your kids are old enough to understand and as they start preparing academically for college. It’s important for them to understand how much education really costs and for you to share what you’ve saved so far," says Patel. "You want them to understand how long it took for you to save the money you’ve set aside and why it’s important that it’s used for their education." 

This conversation should build on a series of money-focused conversations you have with your kid.

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Patel recommends involving your kid in your finances from the beginning. She notes that "checking your balances, paying your bills, and reviewing your budget are great potential teaching moments. Telling them how much bills cost (i.e., your rent or mortgage payment, utilities, gas, or groceries) can really help them start to understand how money works and the value of it."

These little lessons (and your chat about college costs and savings) will help your child develop healthy financial habits when they're an adult. 

Once your child is old enough, help them set up a bank account.

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I was tempted to open a bank account for my infant daughter so I could start accruing interest on money she's gifted (like that $40), but Patel suggests waiting until they're older.

"It’s important for them to actually do it themselves, so they have ownership and can start understanding how it works," she says. "Showing them what you are doing is a great way to teach them. When you open an account for them, have them there."

If people gift your kid money when they're still little, put it aside so they can put it in their first savings account — or put it in an investment account so they can learn how investing works.

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I'm planning to put that $40 collecting dust on my desk in a savings account for her, but I'll withdraw it when she's at the age where she can open her own savings account.

The other option, Patel says, is to invest it. "Investing gifted money for your child can really be impactful later in life. And once they’re old enough, it’s a great chance to educate them on what investing means, where their money is invested, and get them excited about saving for their future."

Disclaimer: this content is for informational purposes only and should not be considered specific investment, tax or legal advice for your situation. 

Hey parents, have any more kid and money tips to share with us newbies?

And for more stories about life and money, check out the rest of our personal finance posts.