The best thing you can do to give your child a good start in life is to start saving money for it the day it is born. Compounded interest will allow the money to grow and the money you save the day the your child is born will be worth a lot more when they child turns 18. If you deposit USD 1 000 into a savings account the day your child is born then the child will have USD 5560 when they turn 18 given a 10% yearly return.
In this article we are going to look a little closer at what you should think about when saving for your children.
Start as early as possible
Compound interest is a very powerful economic force and you should start saving for your child as early as possible. The earlier you start the more money your child will have when they grow up. The example I used above shows you that a dollar that you save when the child is born will be worth more than 5 times more when they child turn 18. If you wait until the child is 5 then the same USD will only be worth a little more than 3 times more and if you wait until the child is ten then every dollar you save will only be worth 2 times more. It is VERY IMPORTANT to start saving early if you want to be able to give your child a nice nest egg when they leave home.
Put away money every month
Most of us is not able to put away a large amount of money when they baby is born. Babies are expensive and you are likely to have a lot of extra expenses at this time in your life. I therefore recommend that you start saving a small amount of money for your child every month. This way you are able to leave your child a large nest eggs when they turn 18 without breaking the bank. As little as USD100 a month can make a really difference and give your child enough money to be able to have a large part of the down payment for their first house. If you can save more then do it. The most important thing is that you put a side a minimum amount every month.
Put the money in a locked account
I highly recommend that you put the money into a locked account. An account that nor you nor your child can touch until your child reaches 18 years old or whatever age you think they child should get access to the money. Some parents prefer to give their child access to the money when the child is 25 or even 30 years old. There are many benefits to this. Giving your child access to the money later in life allows compound interest to make the money to grow a lot more. Another benefit is that many children is too irresponsible to get the money at 18. They end up spending it on booze. If they get it later then they are more likely to use the money in a more responsible way.
It is very important to lock the money. Otherwise it might be very tempting to borrow money from the account for personal expenses or to give the child something they want. Doing this is very expensive since you lose the benefits compound interest can give you.
You should never invest your child’s money in high risk investments. I recommend that you place them in blue chip dividend stocks, a mutual fund or a regular high interest savings account. Stocks is higher risk than a savings account but is usually the best options since you are investing the money long term. The stock might temporary go don in value but should give you a good return over the entire period.