When you're pregnant or caring for a baby, college savings and financial planning can be the furthest thing from your mind. It's hard to imagine that this bump-in-the-belly will soon be a being with expensive needs -- from Pampers to grad school.
But right now, your portfolio matters even more than your trusty diaper bag: Before baby comes, it's vital to make sure you're financially solid, write a will and start saving.
"A lot of people underestimate the cost in having children," says Jasen Biro-S., a financial advisor in the Green Lake office of Edward Jones Investments. The U.S. Department of Agriculture estimates that it costs parents raising a child from age 0-17 between $170,000 and $250,000, which does not include college. "The cost of raising children continues to increase," Biro-S. says. "You've got to have your finances in order to have the opportunities you want for your child."
Biro-S. suggests creating a financial blueprint before baby arrives, so new parents have a plan in place. He helps clients differentiate between good debts and bad debts; the former being those such as low-interest mortgages and student loans that help people invest in themselves and gather assets. Bad debts such as credit-card balances and high-interest car loans can strain emotions as well as college-savings plans, so he urges new parents to pay them off ASAP and start socking away money, even $100 a month, for college.
Set a savings goal
A little bit of number-crunching drives home the importance of early bird thinking. If the cost of college tuition increases at a 7-percent rate of inflation, a child born today who attends the University of Washington in 18 years will face expenses -- including tuition, room and board, and other costs -- of about $216,000. (For comparison purposes, a Washington state resident who lives away from home and attends the UW will pay about $16,000 for the 2005-06 school year.)
To avoid saddling new graduates with debt as they start their professional lives, there are a couple of ways to save. Tackling that tuition means putting away approximately $6,350 per year, or $530 per month, by investing in quality mutual funds with a vehicle such as a 529 college-savings plan.
529 college-savings plans
Similar to a 401K for retirement, a 529 is a college-savings plan that allows individuals to build up tax-advantaged savings for future college and graduate-school expenses.
Biro-S., who teaches workshops on 529 plans at Gracewinds Perinatal Services in Seattle's Ballard neighborhood, says the plan gives parents a great amount of control; for example, if one child in a family decides not to go to college, the parents can transfer the money to a sibling. Also, earnings are not taxed as they grow, and money can be withdrawn tax-free as long as it is for educational purposes.
The plan permits parents to tailor contributions to fit their needs, from as little as $15 a month to as much as $11,000 per year. And because the 529 allows parents or relatives to contribute a large amount of money, Biro-S. says, the plan doubles as an estate-planning tool as well as a college-savings vehicle.
Another approach to college savings is through Washington State's Guaranteed Education Tuition Program (GET), a prepaid college-tuition plan. GET works on a unit system, with 100 units equal to one year of tuition and required fees at the most expensive public university in the state.
Families can purchase up to 500 units, equaling five years of tuition, for use in the future. The value is tied to public undergraduate education, but students can use their accounts at public and private colleges and universities around the country. (At press time, each unit cost $66; a price increase may occur in September 2005.)
One GET customer, Brigitta Bolanos of Bellevue, appreciates that when relatives and friends are choosing gifts for her 1-year-old son, they can contribute to his B.A. rather than his play room by purchasing GET units. "Education is getting more expensive," she says. Planning for his future "gives us peace of mind, because that's what we want for our son. We want him to have possibilities and options in the future."
Write your will
Attorney Jennifer L. White, whose Maple Valley practice emphasizes estate planning, says that for parents-to-be, preparing a will is especially important. Whether you're arriving at the hospital in labor or getting on an airplane, being covered in worst-case-scenarios will give you a sense of security.
"Getting your affairs in order to cover either your death or your incapacity is not for the wealthy only," White says, pointing to the family divisions in the recent tragic Schiavo case. And when you're checking in at the hospital amid contractions, you may be asked whether or not you have completed a will and a health care power of attorney. It's best to answer yes, White says, and add "Here's a copy."
The will defines who the family is, covers who will be in charge of settling your affairs, outlines inheritance of your possessions, makes child care and financial arrangements for your children, and addresses payment of taxes. Also, a health care power-of-attorney document indicates your medical preferences.
"It's important to let your intent be known," White says, particularly "for nontraditional families because they may not have fallback positions in the law that a married couple would have." For instance, if a married couple doesn't write a will, state law assumes the surviving spouse inherits all the community property. But if two single people, same sex or not, live together as a couple and one dies, they are not considered the next of kin or surviving spouse.
"All of those default protections under the law don't apply to them and you can wind up with a wildly different situation than what you would want," White says.
Whether it's imagining your death or facing compound interest on your credit card, the financial-planning process can be grave -- but critically important. With a young child or two, White says, "to find an hour of free time is difficult. When you do find that hour, you don't necessarily want to spend it on researching insurance."
But she knows the effort pays dividends -- the comfort of giving your kids an edge. White says the process means "looking ahead 18 years and saying: How much is tuition going to be then, and where is that money going to come from? You have to start planning. We still have some investments to put in place, but at least we've gotten a good start."
Michelle Feder writes about a wide range of subjects. She has a 3-year-old son and is expecting her second child.