Expecting a baby? Think your newborn will go to college someday? It sounds premature to begin thinking about tuition now, but it’s just good financial planning. Some decisions you make now, before your baby is born or while you still have a tiny newborn, can affect your family’s financial picture for decades. Here are five finance tips for new parents:
1. Set up a 529 plan
A 529 plan account allows you to set aside money for college, graduate school, and other educational expenses while gaining substantial tax advantages. The accounts can be used for the named beneficiary — your baby — as well as any siblings or descendants, so you won’t lose the money if your child grows up to be a rock star or professional athlete and never goes to college. Because of the power of compounding, money that you contribute at birth for your child’s higher education will grow over time, tax-free. If you add funds regularly — many plans offer automatic deductions that let you contribute a set amount each month from your savings accounts — you could set aside a significant portion of your child’s tuition money by the time college comes around. Shop around for the best plans; each state has different rules. Consider choosing a plan that doesn’t require your child to attend college in a particular state, because you can’t know where your family will be living by then or what your child will prefer. Because of the tax advantages, it’s often worth your time to set up such a plan even if you don’t think you’ll have trouble funding your child’s tuition. The first $10,000 contributed each year is typically state tax deductible, so for someone living in a high tax state like New York or California, that could translate into a $1,000 savings on your state tax bill each year. Not many other investments provide for a 10% gain on day one, and when combined with the fact that your 529 contributions grow tax-free, it’s obvious why establishing a 529 plan in the year that your child is born can be a wise finance move for new parents.
2. Set up baby’s first bank account
Relatives may choose to give your child money as a baby gift. Consider setting up a savings account in the child’s name or in trust for the child. You can choose your own bank, or select the one with the best interest rates, since your child likely won’t be using this money for years. Credit unions and online banks typically offer the best rates — which matter since you’re planning for many decades of compounding. CapitalOne 360 offers online accounts for children that pay 0.75% in interest, and recently offered a promotion that funds the first $30 when parents set up an account for a minor.
3. Register for airline frequent-flier numbers
As soon as you start buying a separate airline seat for your baby — you’re not required to do this until age 2, but you may want to start earlier so the baby can sit in a car seat on the plane — sign up for frequent flier numbers on the airlines you fly most often. Just like an adult, a child of any age can amass airline rewards points to earn status while flying. Even if your baby isn’t a global traveller, this is important in oversold situations — air miles members are treated better than those without a frequent flyer number on file. Also consider applying for a passport in infancy, in case your family wants to travel overseas. Even if your child can’t hold his or her head up yet, passport photos can be taken at home by lying your baby down on a white blanket, snapping a head-and-shoulders photo, and taking the memory card to your local photo store, where they can convert the file to passport-sized photos.
4. Add your baby as a beneficiary on your documents
The fourth finance tip is to check with your lawyer to make sure your baby is named in your will — or at least that you’ve put in a provision for your direct descendants without naming them. Also make certain you’ve added your baby as a beneficiary on all your legal and financial documents: bank accounts, 401(k)s and IRAs, pensions, life insurance, and anything else with value.
5. Set up an email address
Who knows if we’ll be using email by the time your baby is old enough to type. Just in case, new parents should sign up for a free email account with a popular service like Google’s Gmail. Try to get the baby’s name (Joseph.William.Smith@gmail.com) if possible, but don’t put into the account name itself any details that you’ll want to keep secret, like the baby’s birthdate. Email accounts are a necessity for virtually all online services, including bank accounts. Once the email address is set up, you can also cc: your child’s email address whenever emailing family photos, creating a permanent storehouse for your baby that he or she will enjoy later on.