You know you’re supposed to be saving money for your kids’ future. But, with everything else you have to pay for, from day-to-day expenses to saving for retirement, saving can feel like a lot. Trust me – I’ve been there. There were several years where my husband and I didn’t save for our daughter’s education because money was so tight. And while taking a break from saving can help get you through a tight spot, you don’t want to do that for long. After all, according to the Department of Education, the average student loan balance per borrower in 2024 was almost $38,000. If we save money regularly during our child’s adolescence, we can do a lot to offset that debt for our kids.
Tackle your debt
You want to start saving money for your kids as early as possible, but if you’re carrying any sort of high-interest debt, chipping away at it should take precedence. Otherwise, those monthly finance charges that you’re paying will be like weights around your ankles. Whenever possible, pay more than the minimum due, prioritizing the debt with the highest APR and then going down the list. Once you offload that debt (hooray!), take that money that you were using to pay it down and shift your focus to saving for your kids and for your retirement.
Saving for those “now and then” expenses
We want our kids to be involved in all sorts of things, like after-school activities and camps. While these things can make for well-rounded kids, they can create a financial burden for parents. I would suggest creating a fund just for these expenses so when it’s time to pay for dues, fees, uniforms, or equipment, you have the money set aside. This practice can also help you set limits if your kids want to try everything under the sun.
Where should you save this money? Sure, you could stuff it into a coffee can or under your mattress, but ideally, look for a place that will earn you some interest. Check with your bank – some bank accounts have a feature where you can for specific categories, or set up auto-withdrawals in a separate, interest-bearing account.
Spending money for the kids
Eventually, your kids will need their own money to spend when they are out and about with friends. When my daughter was 10, we decided that it was time. We couldn’t find a bank that allowed her to have a debit card at her age, so we set her up with a Greenlight debit card which for $4.99 a month (for up to five kids), allowed me to quickly and easily add money from financial gifts that she had received from friends and family and allowance that she earned from doing chores. When she was 16, we switched over to a free kid’s savings account with a debit card at our local bank. This account allowed us to continue to have oversight but ditch the monthly fee at Greenlight. At 18, she switched to a free adult account, and with her permission, we linked her account to ours which provides us with some access and an easy channel to funnel money to her, if needed.
Saving for college
The more time you give yourself to save for your child’s higher education, the better off you’ll be. One of the best ways to do so is with a 529 plan. The earnings from your plan grow tax-free and are not taxed when withdrawn for “qualified expenses”, whereas, with a mutual fund, earnings and withdrawals are taxed. Qualified expenses include tuition, of course, but things like books, equipment, room & board, costs associated with apprenticeships and student loan payments also qualify. And as of 2018, up to $10k of tuition for grades K-12 qualifies as well.
Another benefit of a 529 plan is there may be tax benefits for contributions. Right now, 30 states offer this, including New York, Ohio, Oregon and Pennsylvania. You do not have to buy into your state’s plan, however. In my state of New Jersey, there are no tax benefits so I chose to open a 529 in New York, which is a high-performing, well-rated fund (every state’s fund is different).
From what I understand, it’s best for the adult to “own” the fund and then designate the child as the beneficiary. This is due to more favorable financial aid implications and doing this also allows you to change the beneficiary if you’d like. If the child who was the original beneficiary receives a full scholarship or elects not to go to college, you can earmark those funds for another child (or yourself, if you plan to go back to school) without losing the tax benefits.
It is important to note that the tax benefits vanish if you withdraw the funds for reasons that do not qualify. For this reason, I suggest saving some money in a 529, but save money elsewhere, too, simply because there is no way to know what your child will decide to do when their high school years come to a close.
I would strongly suggest researching 529’s specific to your state before opening the account and again before withdrawing money because which state you open the account in and when you withdraw are very important factors.
Other investment opportunities
There are lots of different options to save for your child’s education outside of a 529, but whatever you do, make sure your savings have growth potential more than what your local bank is offering. Look for high-interest CDs or interest-bearing online savings accounts, set up an account with a savings & investing platform like Acorns, or invest directly (if you’re good at that).
Overfunding a life insurance policy is another option. Some insurance policies can serve as an investment platform to save for college or other long-term goals, so it’s worth speaking to an agent about your options. We are doing a blend of all the above so our money is diversified.
Saving “found” money
“Found” money is like suprise or unplanned money. It could the new child tax credit or the overage that occurs when your child stops an activity that you were previously paying for.
In terms of the child tax credit, if you are in a place right now where that money is crucial to your immediate expenses, that’s what it should be used for. But, if you’re doing ok without it, save that money immediately so you’re not even tempted to use it for something. If your child plays soccer and takes dance but then decides that dance is no longer their thing, take that dance money and save it.
Another form of found money…credit card rewards. It’s not like you were using that money, any way! An excellent fee-free card is the Bread Cashback American Express, which allows you to earn 2 percent cashback on everything you purchase. However, if you use your credit card a lot each month, consider a credit card with steeper benefits, like a gold or platinum card. Yes, there is an annual fee, but that fee is usually offset by enhanced benefits.
In either case, it can be as easy as shifting the funds from your main bank account to a connected savings account. Then when you have a moment, move that money again into a 529 or investment fund.
