Expert: Paul Henneman - 5/6/2007

Question
I have two kids, 5 and 2.  I wanted to open some sort of savings account for them.  I wanted to know if you felt a standard savings account or a college fund would be more beneficial for them, or maybe you might have a better suggestion.  Also, what would you recommend as far as monthly deposits for each account?

Answer
Thank you for your question!
The true answer to this question will vary from person to person, so you should definitely think critically about any information you hear from me or anyone else, and do not fear to decide you have different interests.
In my opinion a money market account is perhaps the best type of 'savings' account to open. This will earn you a small amount of interest, perhaps 3 to 4 percent a year. It is perfectly safe, there is no risk, and the funds are generally easy to access just like a regular savings account.
However, putting the funds to work in some type of investment such as an index mutual fund will more than double those returns to perhaps just over 10% a year on average. The problem with this is that there is risk involved, some years you will earn a good return on the investments for your kids, some years it may actually lose money. But you have a decent time frame, just over 10 years before your oldest goes to college. So in the event there is a year or two of poor performance, it will be overcome.
Certificate of Deposits are another option, perfectly safe, and earn perhaps 5% a year in interest. The problem with CD's is that you purchase them for a set time frame, so the funds cannot be accessed without stiff penalties until the CD's mature. You can purchase CD's for a variety of time frames ranging from a few months to a few years.
www.NetBank.com is my favorite place for CD's or a money market account, their interest is the highest I have seen and they are FDIC insured (very important).  If you do decide to go down the mutual fund path, do some research first. The book "Investing for Dummies" will give you most of what you need, and it is easy to set up an account with one of the online brokerage services such as www.FOLIOfn.com, www.Scottrade.com, or www.Etrade.com to mention just a few.
As a final suggestion, I would recommend the book "The Expectant Father" by Armin Brott and Jennifer Ash. They have other books out regarding young children, but the only one I have read is this one, as my wife and I have a baby on the way.  Interestingly, there is a chapter on finance.  I recommend it because it is brief and simple enough to easily digest, but is right on target.   For example, one of the  problems: The more assets your children have, the harder it will be for them to get financial aid.  Also, anything you invest into your children's savings accounts will be after tax dollars. However, if you invest as heavily as possible into your own retirement accounts, or if you have not started your own do so instead of setting up savings accounts for your children, it is not taxed.  The recommendation they make in this book, and I completely agree, is to 'take care of your finances first'. Large assets in your children's names may actually be a negative in the future, as the college they attend will reduce the available financial aid until that savings is used first. As they state in the book, financial aid departments will assume that 35% of assets of the student will be available for education, while they assume 6% of the parents will be available.  This is all in the chapter that begins on page 78.
I do strongly suggest that you start saving now for your children, there is no sense in waiting. As far as what I would recommend for the monthly deposits, that is easy: As much as possible! You should of course not go into debt trying to make large payments to your children's savings accounts, but the more the better.  Perhaps a seperate account in your name could be set up initially while you research these other issues to decide if the benefits are enough to outweigh the disadvantages to setting up accounts in your children's name. Everyone has a different take on this, so knowing the information and making your own decision is the best advice I can offer. Those two books I mention above should get you there. I would also do some google searches and learn about Education IRA's and 529 plans as two of the more common types of savings for children's college needs.

I hope this helps! Please do not hesitate to follow up with me if I can be of any additional assistance,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com