Life Changes: How to Prepare Financially

You're expecting a baby—congratulations! And while parents-to-be are often consumed by short-term questions and concerns such as preparing the house for the new arrival, long-range planning must also be considered while the baby is still in the womb.

Simply put, a child is the biggest investment his or her parents will ever make. CNN reported in 2011 that it costs the average two-income, middle-class couple $226,920 to raise a child from birth to age 18. That's up dramatically from an average cost of $165,630 in 2000.

And as generations of parents know, the real expenditures begin at age 18 with college. Indeed, it is possible, if not outright likely, that sending a child to college for four years will cost more than the previous 18 years combined.

Such possibilities can be overwhelming for parents still trying to adjust to their new lives with an infant, but beginning a college savings fund as soon as the baby is born is an essential part of planning for a child's education and will yield many benefits down the road. Here are some tips to consider as you start college funds for kids:

—Before the baby is even born, you can begin a college savings fund by asking friends and family members to buy savings bonds for the child. People who are unsure what to buy the baby and/or reluctant to buy him or her clothes he or she will just grow out of in a matter of weeks will take pride in purchasing something that will pay dividends—literally—years later. Set the savings bonds aside and cash them in once the college funds for kids are cashed out after high school!

—Open a custodial account. This may be the most popular choice of all the possible college funds for kids. A custodial account can be opened at any bank and can be opened by any family member (such as a grandparent). A custodial account also allows for donations both large and frequent: any donation up to $13,000 can be made without being subjected to a gift tax. Lastly, unlike other examples of a college savings fund, money can be withdrawn from a custodial account at any time without a penalty, as long as the money is being withdrawn to benefit the child.

—Open up an IRA. Individual retirement accounts can also double as college funds for kids. Keep in mind that you'll pay taxes on earnings upon withdrawing money from both a traditional deductible IRA and a nondeductible IRA but that money can be taken out of a Roth IRA at any time without paying a tax or any other kind of penalty.

—Buy zero coupon municipal bonds. Zero coupon bonds you buy at a deep discount and instead of the interest paying out semi annually, the interest compounds on itself semi annually so that in a specific amount of time the bond is worth $100 at the maturity date. When you first have a child, you can buy zero coupon bonds that mature in 18 years, 19 years, 20 years, and 21 years so that you have a bond maturing for each year college to pay for that year’s tuition. You can put as little as $2,500 into a zero and the interest will compound to be worth $10,000 at maturity.

These are just a few of the options in college funds for kids available to new parents. Contact your financial advisor today to identify the best way for you and your spouse to begin a baby college fund!

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