How to Prepare Financially to Meet Your Child's Education Needs?

How Important Is Your Child's Education?

How to Start Preparing for Your Child's College Years

To Begin preparing to save and invest for your children's education you will need to purchase an account in their name. You will need their social security. Next you need to choose where to start the account.

I like Sharebuilder because I can set up an automatic weekly or monthly investment choice at a previously chosen amount at minimal trading cost to me and forget about it.

You may be thinking, I don't want to pay more taxes on this account. The government has set up a way around this. It is a Coverdell Education Savings Account (ESA)

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. "The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses"*

As long as you use these funds for eligible expenses at a university they are not taxed. Anything used over these costs is taxed at a !0% rate. At age 30 the child will need to take any remaining funds and pay the taxes at 10%.

You can set up such an account at many investing websites as well as Share builder, Scottrade, Vanguard, and others that I will discuss later.



Educating our Children Means More than Teaching Them to Swim.

Teaching them to swim is only the beginning.
Teaching them to swim is only the beginning. | Source

What to Invest In.

What you invest in your child's fund is your next big decision. Exchange Traded Funds or ETF's have become very popular since the early 1990's. They are alot like stocks in that you can trade them throughout the day as they fluctuate. They also tend to have lower expenses than those of mutual funds and even index funds.

Index funds are a group of stocks that are bought and sold together to follow a market index like the S&P 500 or the Dow. They are traded once a day at a set price.

These types of investments are usuallly meant for long term and you probably would prefer buying them in larger quantities, perhaps on your child's birthday or other special occasion.

Because ETF's fluctuate in price throughout the day they can be traded any time although unless you are very experienced you probably would not do that.

To make investment decisions for your child concerning investing in ETF's, Index funds or Mutual funds there are some great websites. I will tell you about a few of these in a moment. You will want to look at things like performance, dividends, preservation, fees, tax information, turnover rate, etc. For ETF's this information is called the Lipper Rating. ETF's are graded on a scale of 1 to 5, 5 being the best for these features. It is very easy to follow and most investment bankers allow you to study these ratings for free as a a service for using their firm. There is nothing wrong with getting advice about this information from a broker if you prefer and that may be the best way for many people to go.

Another alternative may be a favorite high yielding stock. My parents loved Coca Cola, KO and Exon, XOM in the 60's and did very well buying shares of these stocks and holding on to them. They reinvested all dividends and I feel fairly sure that this helped pay for the bulk of my sister's and my education. All of these investments are a matter of personal choice.

Some Possibilities For Good Index Fund Investments

If you like the idea of actively managed index funds here are three good ones.

  1. Vanguard 500 Index VFINX
  2. Fidelity Spartan Index FUSEX
  3. Schwapp S&P 500 Index SWPPX

If You Think ETF's Are Your Choice

I personally like ETF's. I find the Lipper rating system easy to follow and with the myriad amount of funds available that is the way I like to go accept for a few actively managed Mutual Funds and some personal stock favorites.

A few of my favorites are;

IVV Ishares Core S&P 500.

An index fund I like is Vanguard Energy Index Fund VDE

VV Vanguard Large-cap Index ETF

VUG Vanguard Growth Index ETF

DTD Wisdom Tree: Total Dividend

As I picked these I was not concerned about the tax implications since they will be tax exempt for now.

You have to find your own way. These are by no means a recommendation more than some of my favorites. You have to pick your own or find a broker you trust.

No matter how small you start you need to remember you are continually growing income and reinvesting dividends so your investment is growing.

Be diligent about adding a small percentage to your child's account as often as you can.

The sooner you start the better prepared you will be to set your children off on the right start in their adult life. The cost of college tuition continues to grow so know the fruits of your labors will not be wasted.

Be sure to talk to your children about when and not if they will go to college. If you start out from a young age letting them know this is mandatory and not a choice you will be paving the way to helping them to become successful and independent adults.

I hope this helps you to begin to invest for your children'd education. It is never too late and you and your children will reap tremendous benefits from your efforts.


Warren Buffet on Investing in Your Future

How People Like to Invest.

Which approach do You think You might choose to Save for your Children?

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Differences in Discount Brokerage Firms

When looking for an online broker you need to decide if you want a cheaper broker or a Top broker. The difference may not be too important. If you are looking for direction with your brokerage firms you will probably need to pay a higher premium on trades.

Many firms offer incentives to encourage investors. Be sure to check these out as you look for the right company for you.

I have two accounts so I can trade more mutual funds. For these I use Scottrade.

To help with your decision you can go to ratings guides in publications such as Smart Money, The wall Street Journal, Barrons, J. D. Powell, and others.

Online Brokerage Firms

Charles Schwalb

Largest online broker

Minimum deposit of $1000

Commission per trade $8.98


ETrade

Minimum deposit $500

Trade commission $9.99


Scottrade

Cash account $500

Commission for trade $7.00

Has lots of quality information.


TradeKing


No Minimum balance

Trade commission $4.95

One of the top rated firms


TD Ameritrade

Minimum balance $2000

Trade commission $9.95

Also has high quality information


ShareBuilder of Capital One

Minimum investment

Trade Commission $6.95

Often offers financial incentives to open an account

Offers direction in investing

References

* IRS

4 comments

Mhatter99 profile image

Mhatter99 3 years ago from San Francisco

Thank you for this. I put away money for my children. But I also worked with them to keep their grades high. What really helped was staying current on scholarships.


nancynurse profile image

nancynurse 3 years ago from Southeast USA Author

Thanks so much for your comment. You are so right. In our state we have 2 great scholarship programs that the children can obtain by doing well in school and on sat's I agree!!!!


Pedro 24 months ago

If he does not need to use the funds for an extended peirod of time(say at least 1-2 years), he should consider investing in shares/ETF. If he does not have much expertise in selecting stocks, it is better to invest in an ETF.Although the market is rather high, the probability is that he will get better returns in the medium to long term investing in shares than in fixed deposits. Even though the market is higher now, the dividend yields for quite a number of stocks are still higher than FD interest and in the longer term, the potential for appreciation is greater than the potential for loss, particularly in an inflationary environment. He must however be able to withstand the volatility of the stock-market and not be pressured to sell because of margin calls or some other reasons when the market drops from time to time.He can of course wait for the market to come down before going in, but who knows when and by how much it will come down by? I thought the Singapore market recovered too quickly when the STI hit 2000 in mid-2009 and decided to wait a bit. When the STI hit 2500, I thought it might do back down to 2000. When it's around 2900 now, I'm still wondering whether it will go back down to 2500.So, I think I will never know where the market will be in the short term. Even in the long term, I cannot be sure but based on probability, it will probably be up unless the share prices for particular stocks is way higher than the intrinsic values of the companies they represent. But one must be prepared that in some exceptional circumstances, the stock market may take more than a decade to recover(if one started investing at its peak) and some may not have the luxury of time to wait that long. The good thing is one can go into the market gradually so that there is some dollar averaging effect to mitigate the risk of going in at the peak of the market.


Lizabeth 24 months ago

It's about time soemnoe wrote about this.

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