Thinking Ahead – Planning For Your Kids Financial Future


How many thumbs up does our school system get for providing a financial education to our kids – zero. I wish I could say two thumbs up, but sadly…nothing is taught. You’d think banking and understanding credit would be required. You won’t find it though.

Our educational system is woefully inadequate when it comes to teaching kids about finances and savings; this is where parents need to take the lead and provide the guidance kids need and require to ensure their financial future.

I’m not a parent myself but I like to plan for the future and be proactive. I put together a list of options that I’ve looked into. I’m by no means an expert and with time will get more familiar with each one. It’s a start, if you’re looking.

Custodial Accounts for Children

Your first step in the planning for your kids financial future  is getting acquainted with the various custodial accounts. These are accounts that have an intended purpose and incorporate certain benefits unique only to the account itself.

Uniform Gifts to Minors Act (UGMA)

UGMA is an account set up by an adult on behalf of the minor. You must keep in mind that this account is an “irrevocable” gift, which means the adult only controls the account for the minor, but cannot touch the funds. There are exceptions such as school supplies, tuition, fees – expenses that benefit the minor. When the minor reaches the age of 18 or 21 (depending on the legal age of your state), he or she takes possession of the account.

Tax Advantages – the first $950.00 of earning is tax exempt, the next $950.00 is taxed at the child’s rate, and anything over that is taxed at the parents rate.

There is no annual contribution limits and anyone can make contributions to the account. The custodian can open this account at either a bank, credit union, or brokerage firm. Annual fees are usually waived if a small monthly transfer is made or a small minimum balance is maintained in the account.

Life Insurance

Life insurance is something we must touch on because it’s not really understood or considered, in a kids financial plan. There are so many different life insurance products these days that it’s impossible to review all of them, but in short – the tax deferral advantages for a life/savings policy for the long term are extremely beneficial to a child. Since life insurance is based on mortality tables, the younger the child the lower the rates. It’s amazing how small monthly premiums can add up after twenty or so years using compounding interest.

Educational Planning – 529 College Plan

The cost of college keeps going up, so planning now will help defer those costs. Thankfully our government has provided a way to get the most “bang for our bucks” by offering the 529 savings plan.

Anyone can open a 529 savings for a minor, but typically the parents will be the owners. The child will be the beneficiary and your state dictates where the funds can be invested. The investment aspect is a little different compared to the other things we’ve covered so far. There are state and federal government guidelines enforced for where and how the monies are to be invested, which means you have little say in the investment options.

Benefits – the main benefit to this type of account is taxes. There are none – that is if the money is used for college and qualified expenses. What if the money is not used for college? In this case you will be taxed on the earnings and pay a 10 percent penalty for doing so. Keep the term “qualified expenses” in mind. This is really key to the overall cost of college (besides tuition), and the flexibility is much greater compared to the 529 plan, where your contributions go directly to the school. Yes, there are two 529 plans, the one we outlined and one where you pay the school directly for a period of years. Most people opt for the plan we outlined because of its flexibility.

Also, check with your states tax guidelines. Your state may give tax deductions for qualified 529 contributions.

Teaching Your Kids to Save

You’ve done your part as a parent, now it’s time to teach your kids how to save.

As long as your child has a social security number, they can open an account. Savings accounts pay nothing in interest these days, but the idea is to get kids in the habit of saving, and the earlier you start the more ingrained this habit will be. Statistics point out that the earlier a child learns to save the more financially savvy they become when they get older.

Like any habit, establishing good financial habits is paramount to securing a good financial future. Not only will your kids learn to save, but along the way they will also learn about the different investments, e.g., stocks, bonds, annuities, mutual funds.

It’s sad that such important financial fundamentals are lost in the early years of the educational system, but knowing this, as a parent, you are now armed with information to fill this gap. There’s no doubt that your kids will greatly appreciate what you have done for them when they get older.

Leaving a Legacy

A few months ago John @ Frugal Rules wrote for us on the topic of Starting a Legacy and the importance of financial security to achieve this. Be sure to check it out. It’s a great read! His article made me think and ponder on how a financial education starts at home; between parents and their children. It’s imperative they learn these things before venturing into the world and making crucial financial mistakes with horrible consequences. We got to teach them.

How do you teach finance to your kids and any tips for the rest of us?


  1. Cash value life insurance is also a great college planning tool. It protects your ability to fund tuition in case of early death, and the cash value that grows inside the policy is not counted as an asset on financial aid forms.

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