By: Bruce Bahlmann

It is hard to think about saving any money now that you finally have this baby however, what ever you can put away now will be compounded so it is best to start early and save as often as you can. There are some investments widely recommend among financial planners that every new parent set up immediately (the longer you think about it the less likely you will do it and the more likely you will kick yourself several years from now for not acting faster).

• "Whole Life" Insurance Policy for Child
• 529 Educational Savings Account
• Increased life insurance for you and your spouse

This first investment may seem odd. Why invest in a life insurance policy for your child at the beginning of its life when it seemingly is only useful at the end of one's life? The answer is simple. Life insurance is NOT cheap. If you are 30-40 years old and just now looking into life insurance, you'll be alarmed at the costs - even for term insurance. Reason, it costs increasingly more as you get older. However, when you are young, it is really cheap. Oh, if I only had a million dollar policy on myself, I would not have to buy any supplemental term life insurance as an adult. If you have the funds, buy a 1 million dollar "whole life" policy for your child from a reputable firm like (Northwestern Mutual, State Farm,  etc.). If the company has not been around for more than 50 years, don't even call them. My preference is either Northwestern Mutual or State Farm - use the best. If you can't afford a big policy, at least take out a small whole life policy. A $25,000 whole life policy on a newborn will cost you about $12 to purchase and then $12/month there after and is "the right thing to do" for your child.

Whole life policies differ from term insurance because they actually build equity that your child can one day use for example to make a down payment on their first home purchase, contribute the the amount of insurance when they one day have a family, keep for their eventual retirement, or just pass along to their dependents when they pass on. For example, a 25,000 policy could be worth as much as $80,000 for child when they retire. If you can purchase anything close to 1 million in coverage, it may well be the only policy your child will ever need for the rest of their life. If you can't afford a million dollar policy, look for something more affordable but don't deviate from the "whole life" series and try to not purchase anything less than 100,000 - your child will thank you one day for this forward thinking. Most house holds carry between 400k-750k to permit the remaining spouse to carry on in the event of the other passing on. Note, there are those that say you should buy less insurance and then invest the difference in a mutual fund. This sounds great in theory, but in practice the investing never achieves the same level of diligence as the whole life policy - so buy as much insurance as you can afford and what ever you have left in your budget, fund a 529 as below.

A 529 educational savings account earns interest tax free but must be funded with after tax funds. Most funds can be set up with very small initial down payments (generally around $250) because they will be funded monthly from your bank account. If you fund as little as $50 a month, it will make a dent in your future college savings efforts. Such educational accounts are easy to set up, the hardest thing to decide is how much to contribute monthly and what mutual funds you should purchase within the 529. You should pick something middle of the road risk wise (balanced mutual funds are a good choice for the 529). If you pick something riskier and forget to keep an eye on it, it may be on one of its downward spirals around the time your child wants to go to school. With a balanced fund, you need to do less worrying and watching.

Some people will tell you that you need to amass something like 500,000 (or more) for college. These are the same people that send their kids to private grade school at the rate of 14,000 (or more) per child per year. It is hard to believe that some people spend upwards of 200,000 per child for their children to attend private grade school only to turn around and fork out another 500,000 or more for college. While it would be great for your child to get into Harvard, realistically very few people can afford Ivy League schools. The rest of us are more than happy with public schools and state colleges (both were good enough for me). The following is a breakdown of what different types of colleges will cost.

• State University - $10,000-20,000 per year
• Private College or University - $20,000-50,000 per year
• Ivy League - $50,000-200,000 (and up) per year

In the end, be happy your child wants to go to college anywhere, but try to keep it in perspective. There is no sense in jeopardizing your early retirement just to send your kid to Harvard. Instead, send your child to state college and with the money you save regularly visit your child and be part of their life. 

I'm also an advocate of a child participating in the funding of their schooling through grants, scholarships, and student loans. While I don't believe children should be burdened with the full cost of tuition, having children pay for some of it can be a wise decision. Increasingly, parents are moving towards garnishing some of the wages of their children to further fund each child's educational savings accounts (for example 1 in every three dollars of your child's earnings could be directed by the parent to go towards their college fund). Such funding prepares children for the costs of higher education and also instills in them a sense of responsibility beyond enjoying a free ride.

Don't forget about your responsibility to each other. What if the main bread winner in your family passed away? Would your spouse have enough money to support him/herself as well as your children or would they be required to sell the farm, go back to work, and leverage everything you worked hard for just to survive? Most people have double their yearly earnings worth of life insurance courtesy of their employer along with perhaps a small life insurance policy on the side. However, that just isn't enough. You should put enough away for the following:

• Pay off your house, car, and any other debt
• Support your spouse for at least 5 years
• Fund what remains on your children's educational fund or life insurance

If you are thinking that $200,000 of life insurance will suffice, think the worst case scenario in that your spouse passes away and leaves you to run the whole show without someone to care for your children. What would you need to survive? Would you want others to care for your child or children while you work or would you want enough coverage that would allow you to not have to earn a living? Your insurance agent can help you figure out these numbers more realistically. When adding insurance to cover such items, the cheapest way to do this is to purchase "term life insurance" for you and your spouse but again, only use a reputable agency like the ones mentioned previously. Don't take risks.

(C) Copyright Birds-Eye.Net, All rights reserved.
It is against the law to reproduce this content or any portion of it in any form without the explicit written permission of Birds-Eye Network Services, LLC. Federal copyright law (17 USC 504) makes it illegal, punishable with fines up to $100,000 per violation plus attorney's fees.