Congratulations, new parents! You have yourself a bouncing bundle of responsibility. You and your partner are free to shower your baby with love, affection, and lots and lots of stuff -- but miniature bipeds are expensive. It costs approximately $245,000 to raise a child from birth to the age of 18, not including college. And given the increasing cost of...well, everything, not to mention kids' bottomless interest in new technology, how can you afford to grant your child's every wish?
It just so happens that we've come up with a strategy to keep your cub content for just $25 a month. There is a catch: You'll have to delay the gratification of spoiling your kid rotten until they're a teenager. For an enthusiastic first-time parent, this strategy may feel like it requires the patience of a Cubs fan. However, when you weigh the expenses of a baby against the expenses of a teenager, the teenager wins hand down. Diapers are cheaper than car payments. Baby food is less expensive than a Playstation 4 -- and will certainly be cheaper than the Playstation 6 in 14 years.
So what's this powerful strategy for building a goodie fund for your kid? Starting the month your baby is born, simply invest that $25 into a UGMA or UTMA account every month.
What are UGMA and UTMA accounts?
UGMA and UTMA accounts are custodial accounts that let you invest on behalf of your child from the day they're born. UGMA stands for the Uniform Gift to Minors Act. UTMA is an acronym for the Uniform Transfer to Minors Act.
Minors (those under age 18) cannot legally trade investments -- but neither the government nor investment firms want to turn away potential investors. UGMAs and UTMAs are offered by states to let minors own investments with the oversight of an adult custodian. These accounts are fully owned by the minor and must be used in the interest of the minor. They're also irrevocable, which means you can't take back any contributions you make. Until your youthful investor reaches the age of majority in their resident state (usually 18 years old), the adult custodian is responsible for managing their account.
UGMAs and UTMAs are similar. UGMAs are more restrictive when it comes to the types of investments that can be held in the account. These investments are usually limited to stocks and fixed income investments, which include bonds, certificates of deposit (CDs), and notes.
UTMAs are less restrictive: They allow you to invest in stocks, fixed income, annuities, and hard assets such as real estate and art.
What are the benefits of UGMA/UTMA investing for 13 years?
Say you invest $25 a month into a moderately aggressive mutual fund with a 7% annual return through a UGMA or UTMA. When your bundle of joy turns 13 years old, they'll have $6,400, and you'll be able to withdraw about $108 per month, or $1,300 annually, until they're 18 years old, with no additional investment required.
If that $1,300 withdrawal is used for the benefit of your child, then Uncle Sam doesn't care how you spend it. Does your kid need a new phone? Done. A laptop for school work? You got it. A trip abroad? You might need to cut back on next year's withdrawal, but it's still within reach.
You could also simply be practical and buy them shoes, school uniforms, athletic summer camps, or early college classes. If, after 16 years of playing chauffeur, you're tired of carting the kiddies around, they'll have nearly $9,000 to use as a down payment for a car.
What are the benefits of UGMA/UTMA investing for 18 years?
If you'd prefer to give your child a head start on adulthood, rather than a luxurious adolescence, then continue your $25-a-month investment into a UGMA or UTMA with a moderately aggressive mutual fund with a 7% annual return until they're 18. By the time Jackie or Johnny can vote, they'll have close to $10,800.
In today's dollars, that's probably enough to put them through their first year at an in-state university. If they opt out of college, that money could buy them a car to get to their first job or move them out of your basement and into their first apartment. Be warned, though: These assets will affect your child's eligibility for financial aid, so if the primary goal of the account is to cover college expenses, then you're probably better off saving through a 529 plan.
How should you invest?
Start by finding a firm with low to no UGMA/UTMA account minimums and investment minimums. Then pick a balanced mutual fund or broad-based index mutual fund with an automatic investment plan (AIP) for $25 minimum monthly payments. Set up a monthly direct deposit from your employer or an electronic funds transfer from your bank into this account.
Once the account, AIP, and monthly contributions are set up, your 13- to 18-year investment plan is on autopilot. Review your quarterly statements and review your mutual fund's performance each year and make any adjustments necessary. When you've saved $2,000 or more, consider adding some additional mutual funds for more strategic AIP investing.
One last tip: As your earnings (hopefully) rise over time, increase your monthly contributions so the account's returns are not eroded by inflation. If you get a $2,000 raise next year, then what's a few more bucks each month for your child's future?
The key to most successful investment strategies is to start early and invest regularly. Most of us won't miss $25 a month, especially when that investment could be worth several times that amount down the road. Plus, when there are several thousand dollars in your teenager's account, you may be able to hold their attention long enough to teach them the values of investing and compounding interest.