First Steps for Your Baby’s Financial Future

Dear Carrie,

I’ve just had a baby! Things are pretty crazy in my house right now, but I want to be sure I give my daughter every opportunity I can. I have a little bit of money saved up, but I’m uncertain what the best use is for it. Should I buy a savings bond, open a CD, start an investment account, or put it all in a college fund?

—A Reader

Dear Reader,

First, congratulations to both you and your daughter. I’d say she’s fortunate to have a mother who, in the midst of all the new baby responsibilities, is already thinking about the future. As a parent myself, I can tell you that the future—and all the related expenses—comes all too quickly!

Being ready for those expenses goes hand-in-hand with smart saving habits, so it’s great that you’ve already begun. Whatever the future holds, continuing to save will be the cornerstone of providing a solid financial foundation for your daughter.

In terms of what to do with the money you’ve already saved, that depends on how you expect to use it. While college is often a primary goal, there will be many interim financial goals that you’ll want to meet as your daughter grows up. Let’s look at how you might plan for each.

Consider a 529 account for college savings

When it comes to planning for higher education, a tax-advantaged college savings account, such as a 529 plan, is often the best choice. This is a state-sponsored program that lets parents, relatives, and friends invest for a child’s college education. The account belongs to you, not your child, and you remain in control of the money.

Usually, 529s offer a selection of professionally managed investment portfolios, including age-based funds. Potential earnings grow tax-deferred. And you pay no federal taxes on earnings as long as you use the money for qualified higher education expenses, such as tuition, books, and room and board. Some 529s even allow you to use up to $10,000 tax-free for K–12 tuition expenses.

Opening and contribution minimums vary by state—some requiring either no initial deposit or subsequent contributions at all. And you’re not limited to your own state’s 529, so you’re free to shop around at different financial institutions (though you should first consider any state tax benefits your own state’s plan may offer). 

Plus, you can set up automatic contributions—say $50 or $100 a month—making it easy to keep saving. Under a special election, you can invest up to $75,000 as a single filer ($150,000 for married couples filing jointly) at one time by accelerating five years’ worth of contributions without being subject to gift taxes.¹

Designate different accounts for other needs

While a college account may be at the top of your list, there will be other opportunities—say music lessons or private schools—that you want to provide your daughter along the way. To save for such eventualities, consider these other types of accounts.

• Custodial brokerage account: This is a brokerage account established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) and managed by a parent or guardian on a child’s behalf. It offers minor tax advantages and has few restrictions on how the money can be spent as long as it’s for the benefit of the child beyond daily living expenses. Unlike a 529, there are no curated investment portfolios. You can choose from a wide variety of investments—stocks, bonds, fractional shares, ETFs, mutual funds—according to your investment preferences and your feelings about risk. A key difference is that the child takes control of the money at the “age of majority,” which is 18, 21, or 25 depending on state rules. That’s something to think about.
• Regular brokerage account: This is a taxable account that you could open in your own name and earmark the savings and investments for your daughter. You’d then have the control and freedom to use the money as you see fit. Like a custodial brokerage account, you can choose from a wide array of investments. 
• Passbook savings account: This could be for short-term savings needs. It’s also an account your daughter could contribute to as she gets older.

As for investments, equities generally have the greatest potential for long-term growth. Realize, though, that because stocks are volatile, they should be reserved for goals beyond a five-year time frame. For shorter-term goals, CDs and savings bonds are safer; the tradeoff is that they offer very low interest rates.

Create a plan

If you have a savings plan, putting money aside will be easier, so here’s what I suggest right now. Assuming college is your first goal, put the money you currently have saved in a college savings account and commit to adding more each month. Not only do 529 plans offer the potential for tax-free earnings for qualified higher education expenses, but when it comes to federal aid, the ownership rules are more favorable than for custodial and brokerage accounts.

There are a number of online calculators to help you determine a realistic monthly savings goal. While you determine your budget, review your life insurance needs and estate plan. With a growing family, it’s important to take steps to ensure there aren’t any gaps in protecting your loved ones. 

As you’re able to save more, consider a brokerage account or passbook savings account for other types of expenses. You might also establish a monthly savings goal for this account and put it on automatic as well. 

Don’t forget your daughter’s financial education

As your daughter gets older, be sure to involve her in the process. Help her create her own savings goals and have her save a portion of any money she gets. This will get her into the savings habit early, teach her how money grows, and help her make good spending decisions. No matter how much you save for your child, teaching her to be financially independent is really the greatest opportunity you can give her.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries contact Schwab.

¹Per beneficiary in a single year if you elect to recognize that gift over five years for tax purposes and make no additional gifts to that beneficiary over the next five years.