Email question: Just had a new baby, where is the best place to save money for my kid?

Written by
Peter Dunn

Hello Pete the Planner,

Between the baby shower and my son's baptism he has approximately $5,000 just sitting in a savings account at our local bank. What should we do with that money to maximize it's potential by the time he turns 18?


Buffalo, NY

Hey Greg,

Thanks for the question!

Two years ago, I was in your spot. Well, not technically because my friends were not nearly as generous with the dollars, but I did have a newborn, so...

To move forward you need to answer a question: Do you want this money to be for college or for just general money your son can access at 18 for whatever he wants?

I recommend the college route. Mostly because education is always a good idea, but also because of other reasons which I'll get to in a minute.

The first place you want to go to for any college savings is your state's 529 plan*. It's kind of like an IRA, but for college. Primarily these plans are so attractive because of their tax credits. I've written about 529 plans before, check out this post for a lot more information, as well as a breakdown of benefits per state.

Next, natural question is, what if your kid doesn't go to college, or you don't want to plan for him to go to college?

Other options for this money are an UGMA or an UTMA, which are types of brokerage accounts. What might appeal to you about these accounts is the funds can be used for whatever your little child's heart desires. To learn more about these plans you can go to a local financial advisor for more information.

It's awesome you have this chunk of $5,000 already saved for your kid, and it's even better that you are open to growing the money, but don't forget about adding to it with your current income. Setting aside $100 or more a month sounds daunting, especially with all the new baby expenses, but you can do it. Especially as your kid ages out of certain expensive items, like diapers. Keeping the money allocated to your kid by saving it, means more money for you son in the future. If you can add $100 a month of your own income to the $5,000 already saved for the next 18 years, assuming you make 8% in interest (this is a hypothetical rate of return), you will have saved $64,920 for your son.

Greg, I also answered your question on air on The Pete the Planner Radio Show on 93 WIBC this week. Listen here for a more thorough answer to your question:

*In full disclosure, I do radio and TV promotions for the Indiana 529 plan. While this should make you take what I have to say with a grain of salt, I will say I would recommend this plan regardless of whether or not I was working with them to promote the plan.

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