Welcome back to “Ask an Advisor,” the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.
Having kids is expensive. On average, the total cost of raising a child to age 17 in the United States is about $310,600, according to the Brookings Institution — and that’s before college. The average private college tuition in the U.S. is about $42,200, according to the U.S. News & World Report — or $168,800 for all four years.
Fortunately, a number of financial devices are available to help cover the costs. College savings accounts like 529 plans allow investments to grow tax-free, as long as the withdrawals are used for educational purposes. There are also UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) accounts, which are more flexible but don’t offer the same tax benefits.
And of course, parents can also choose to save money the old-fashioned way — by buying bonds, investing in an index fund or stashing some cash in a high-yield savings account.
READ MORE: 5 key tips for advisors on 529 college savings plans
So what’s the best way to save? The question becomes especially pressing when a baby is on the way. One reader in Portland, Maine is expecting not only a child but a generous gift from the grandfather-to-be. What should she do with the money? For guidance, she turned to the experts. Here’s what she wrote:
Dear advisors,
My husband and I are having our first child. When our baby is born, my father-in-law is planning to give us each $14,000 — a total of $28,000.
We are already saving and are in pretty good financial shape, so we don’t technically need this money. How should we invest it so it has the biggest impact later on for our child? Should we use this as a starting point for a 529 plan, invest it in an index fund or put it in bonds? Or simply save it in a high-yield savings account? Any suggestions?
Sincerely,
Pregnant in Portland
And here’s what financial advisors wrote back: