It can be very expensive to have a child. The child requires diapers and a lot of other expensive things. If the mother want to spend some time at home with the baby then the family will lose income. If the mother returns to work then they will have to pay for child care. All these and other extra expenses can make it very hard for the parents to be able to save money for their children. Grand parents are often in a lot better position to save money and you as a grand parent can help make sure that your grand child get a good start in life when they move away from home.
In this article we are going to look at what you should think about if you want to save money for your grand children.
When to start saving
Start saving as early as possible. Ideally the day they are born. The earlier you start saving the more money there will be in your grand child’s account when they turn 18. If you put 10 000 into an account (savings, stocks, mutual fund) for your grand child they day they are born and get a 10% yearly return the the child will have more then 55 000 when they turn 18. If they have to wait until 25 before they get access to the money then they will have over 108 000.
Try to start saving for your grand children as early as possible and try to put a little extra money away each month. It all adds up even if you can only put away a little each month. You might not be able to put 10 000 into an account as in the example above but the important thing is to put something away each month.
Lock the account
This might sound cruel but you should never trust your children to have access to the money you put away for your grand children. They might dip into them with the purest intention and do a lot of damage by robbing your grand children of the benefits that compound interest can bring them. It as all to common that good well meaning parents borrow money from their children’s account without understanding the damage they do. By locking the account you remove the risk of this. Locking the account also helps the child’s parents as they do not have to face pressure from the child to dip into the account to buy things they want.
Why they grand children shouldn’t have access to the account should be self evident. The money is to give them a good start in life when they move away from home. Not for making purchases before that.
Using a good man
Sometimes it can be a good idea to assign an independent trusted person that can approve withdraws from the savings account if it is deemed to be in the interest of the child. This can make it possible to withdraw money from the account for good causes. Lets say that your grand child want to go to Paris to study french. Then he or she might be allowed to dip into the account. If the child wants to buy a new play station they are not allowed to do it. A trusted man is there to allow the child to use money if it is for their future benefit.
Stocks or savings account
You should avoid high risk investments when saving money for your children. Stocks can however be a very good option despite being higher risk than a savings account. Below we are going to look at the benefits of investing in stocks vs a savings account.
- A savings account is 100% secure provided you choose a federally guaranteed savings account. These accounts will however often offer rather low interest rate. This can have a very big impact on the amount of money your child gets when it turns 18. 10 000 placed in a savings account with a 5% interest (high for a savings account) will contain just over 24 000 after 18 years.
- Stocks is a higher risk alternative but is still a relatively low risk alternative when you invest long term. 18 years is long enough that the stock will have time to rebound even if there is a stock market crash during the period. 10 000 invested in stock will provided a 10% return (less then historical average) be worth over 55 000 in 18 years. The portfolio can drop 50% in value during the last year and still be worth more than the savings account would be worth.All this is provided that you invest in large established low risk stock.
I personal think a mixed portfolio of stock is the better option but it up to you to decide what you think is best for your grand children.