Do’s and Don’ts of investing for your child or better yet your Grand child
1. Teach yourself about the cost of an education today and what it will be in 18 years when your child goes to high school.
2. Set goals, and if your goal is for your child to attend an ivy league school or comparable, then you know how much you will have to set aside; factor in that as you age your income should be rising so you will be able to set aside more when you earn more.
3. Open a stand-alone account known as a Uniform Gift To Minor Account so the college fund is segregated in fact and in your mind, it is not an emergency fund!
4. Choose appropriate investments based on when you will need the money; invest in growth when your child is young and as you approach high school graduation shift the assets to money markets and more predictable assets.
5. Take risk when your child is young so you take a shot at ultra high returns when you have time to recover and when the amounts you are investing are smaller.
6. Grandparents are allowed to gift up to $20,000 per year, and less is ok.
Cost of an Education
While today’s costs seem out of reach you can mitigate many of the costs by analyzing all your sources of income and figure out how much you can cover and how much your child can borrow. Stay realistic, champagne tastes and beer budgets can lead to defaults on school loans. In many cases the state school provides as good an education as any other school, the contacts for the future are different but explain that to your child. That is how the world turns.
Set Goals
If you think your very young child is going to attend USC for example, and won’t be playing football, then figure the cost of an education to be about the cost of a new Range Rover every year. In 1990, the range rover cost $31,750 and in 2010 it costs $65,000. That adds up quickly but you can do it if you start early enough and plan accordingly.
Uniform Gift To Minor Account (UGTMA)
Set up a UGTMA at a discount broker and contribute to the account monthly. This has a very important impact on saving and investing for your child. If you co-mingle your assets with your child’s then you are prone to dip into the funds, like an emergency vacation or sure thing investment (rarely ever). Additionally, the account is an excellent place for grandma, grandpa, and rich aunt Louise to gift your pride and joy.
Invest for your Child’s Time Horizon
Invest so the money is available and liquid when your child needs it for the first year of college. If you have 18 years until college, invest in growth stocks or funds; you have time for them to work out if you choose the wrong investments. As you approach graduation become more liquid so you can pay for tuition, books and all the other attendant costs of college. Grandparents should consider US Treasury Bonds maturing upon graduation from high school. They can invest more at once and feel confident it will be there for your child.
Risk Taking
I paid for my kid’s education mostly with stocks I bought when they were very young. I invested in robotics (Denning Mobile Robotics), biotech (Amgen), and technology (Microsoft). Take the risk when they are young and shoot for outrageous returns, by all means research and read all the business news you can, it will pay off with good ideas for your high-risk phase of investing. Risk will always be with you, so learn how to take it and how to limit it!
Grandpa and Grandma
Encourage your parents to gift if they are able and thank them profusely if they do. The best way for them to gift is to use conservative investments that have predictability and require no management. Any time money is involved people like to maintain control. Gifts represent a way for people to influence something they believe in and want to support. Grand children are the reason to have children, after all. They are cute and loveable and they go home at night, what a prescription for on-going fondness. Grandparents can gift up to $20,000 per year, and won’t that pay for just about any education?