Over the past 60 years or so, it’s become customary for parents to save for their kids’ college education. But times have changed, and with them, so have our financial circumstances — and our expectations. They may not want to go to college, but you may need to save for any future. After all, he or she may have career aspirations that don’t involve a college degree, but still require capital.
A college degree no longer will guarantee your child a bright future, and the prospect of lifelong student loan debt can be discouraging. Besides, there are plenty of career and job options that don’t require college coursework.
You’ll still probably want to save for your child’s future. But if that doesn’t involve college, what’s your next step? Here are some recommendations.
Consider a UGMA or UTMA to save for any future
A UGMA or UTMA account is one way to help your child save now so they can make their own decisions about how to use their money later on. Because minors aren’t allowed to sign a contract on their own to purchase stocks, bonds, mutual funds, etc., you have to act on their behalf. These two vehicles allow you to do that until they’re grown.
- UGMA is short for the Uniform Gifts to Minors Act, which was passed in 1956 and updated in 1966. It allows you to give a tax-free gift to your child (up to a certain point) without having to appoint a trustee or set up a trust fund. All states allow UGMA accounts.
- A UTMA is slightly broader in that it can include non-financial assets such as artwork, real estate, and intellectual property. Many, but not all, states allow UTMAs.
Although these accounts are free of gift taxes, they’re not tax-deductible for you. Once your child is of age, these accounts become their property to do with as they please.
Open a savings account
It’s traditional to open a savings account for your kids so they’ll have money for college, but there’s no reason to confine your goals to the academic arena. You can help them save for other goals, as well, such as buying their first car or, down the line, having a down payment available for a house.
A savings account won’t earn you much interest, but it will allow you to put money aside regularly that your kids can call upon when needed. You also can open with your kids a joint savings account that they can co-own, which will involve them directly in the process and teach them the value of saving.
Help them build credit
You may not think of building credit as a way of saving, but if you look at it a certain way, it is. The better your credit, the bigger the loan your child will be able to obtain for a major purchase down the road, and the more money you’ll save (yes, save!) by keeping your interest rates low.
You can teach your child to build credit by opening a joint credit card account with them when they are of age. Or they can get a student credit card, or one linked to a secured account. No matter which option you choose, teaching your child to use credit responsibly can set them up to travel, start their own business, or follow another of their dreams.
Tap into your Roth IRA
Roth IRAs are designed for retirement, so you incur a 10% tax penalty if you withdraw any interest you’ve gained before the age of 59½. But that penalty doesn’t apply to the principal (your initial investment), which you can withdraw for any reason — it doesn’t need to be for retirement. It can, for instance, be used to help your kids.
If you do this, though, you should be aware that there will be less money in your retirement account to earn interest. In this case, you may need to do something else to bolster your retirement funds. Any decision you make should be part of an overall retirement plan.
Purchase a certificate of deposit
You can purchase a CD, or certificate of deposit, which gives your bank the right to use the funds for a specified period of time (and if you withdraw them early, you’ll incur a penalty). It might be six months, a year, or five years. In return for the right to use your money during that period, the bank pays you interest.
CDs purchased through federally insured banks are safe, because they’re insured up to $250,000.
You can take the money you might otherwise have used for your child’s college fund and invest it in the market, instead. Weigh your options carefully first. If your child is old enough, go over everything with them so they know how their money is going to be put to work. Consult with a financial advisor to find out your best options.
Buy savings bonds
Savings bonds are government-issued bonds that are meant as long-term investments, sold for less than face value. They generate interest for a specific period, usually between 15 and 30 years, and only then can they be redeemed for their full value. (You often have to wait several years to redeem them at all.)
Government bonds have been a common way of saving for college over the years, but that doesn’t mean you can’t use them for other forms of saving, as well.
These are a few of the ways you can explore to save money for your children, even if they decide they don’t want to attend college. This isn’t necessarily a problem, as there are more educational and training options available to students than ever before, from apprenticeships to online courses.
If your kids go this route, you’ll be able to dedicate more of your money to helping them get off to a good start in life — without worrying about books, tuition, and student loans. That’s how (and why) you should save for any future.
Bio: My name is Ann Lloyd and I’m a newly enrolled MBA grad student. I’m getting my degree online and working as a marketing intern on the side. In my spare time, I’m hard at work on the Student Savings Guide, my blog about living a budget-conscious life. The guide caters to students and recent grads, but anyone can use these tips to get by.