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Things like your average sleep and coffee intake shift drastically once you enter parenthood. Financial decisions and financial planning for your child’s future are big ones. Spending, budgeting, and saving become increasingly important as your family tree grows. However, according to a study, less than 60% of Americans are financially literate, and the 43% who lack a financial education feel overwhelmed when making financial decisions for themselves and their families. While basic financial terms such as investing, diversification, and credit score should be common knowledge, the notable financial literacy gap among adults is prompting schools nationwide to take action to teach the next generation about money. There have even been more than 90 financial education bills introduced in 28 states.1,2
State financial education mandates have historically led to a clear improvement in financial behaviors, which signals more financial confidence for future generations. Whether you live in a state that offers financial education courses, there are plenty of ways to start building wealth for your family, begin financial planning for your child’s future, and save for your kids while passing down critical financial skills.3
Generational Wealth and Financial Planning for Your Child’s Future
Generational wealth refers to financial assets passed down through families to children, grandchildren, and beyond. Assets passed from generation to generation might include cash, investments, property, art or antiques, and even stakes in family businesses. Saving to build wealth is a critical part of the personal financial puzzle. Yet for some, this concept feels out of reach, and it’s easy to see why, with many Americans struggling to make ends meet. As of January 2023, 60% of U.S. adults lived paycheck to paycheck.4,12
With this grim reality, those who can put away money for their child’s future represent a small fraction of society. Just how small? A 2018 Federal Reserve analysis of the Survey of Consumer Finances estimated approximately two million households out of 127 million receive a generational inheritance or substantial gift each year. According to the Fed, most inheritances are for less than $50,000, and only about 2% were for $1 million or more. Instead of feeling overwhelmed by looming debt or everyday living expenses, the key to building wealth is to start small. You don’t have to save a lot at once; you only must start. Start with what you can and gradually increase as you get comfortable with your financial planning for your child’s future.9
Budgeting and Financial Planning for Your Child’s Future
Over 176 million people are financially unhealthy, and the wealth gap widens. Many report spending more than their income, needing more short-term savings, and a lack of confidence in their long-term savings.5
Budgeting and mapping out expenses can be a strong jumping-off point to set aside money to build wealth. Of course, where you call home dictates your budgeting needs. While a two-parent, two-child family in Washington will spend $11,212 per month or $134,547 per year to secure a modest yet adequate standard of living, the same family structure in Mississippi will pay half that.6
The Economic Policy Institute’s Family Budget Calculator measures and breaks down average family incomes based on geographical location. Often, using tools like these to visualize and outline budget breakdowns can help parents recognize areas they can cut back or save.6
To save money or cut back on costs, consider how many streaming services you pay for monthly or whether that daily morning breakfast trip can be swapped for meal-prepped options or limited to one day.
Many financial experts encourage clients to follow the 50/30/20 rule. The goal is to spend 50% of your monthly income on essential expenses such as rent, monthly bills, and groceries, 30% on non-essential purchases such as going out to eat, and putting 20% into your savings account.13
Since you’re focused on saving, you may use money from your non-essentials or “wants” category to make extra debt payments. Even if this rule isn’t feasible initially, it’s a great goal to work toward over time and a helpful guideline to visualize spending. The more mindful you are of money flowing in and out of your household, the more likely you are to save long-term. You can even help children prepare for college by developing a budget breakdown of their own using this calculator, which allows you to input your expenses and income for a school year running from September through April. Exposing kids to how a budget works also passes down meaningful life skills like discipline and delayed gratification.14
One option to save for your child’s future is to open a 529 college savings plan. A great alternative to the toys piling up in their playroom could be to remind relatives that they can contribute directly to this account when holidays and birthdays roll around. There are no income limits for plan contributions, but depending on where you call home, each state has unique specifications to benefit from this option. This option is attractive for families of all socioeconomic backgrounds because plans generally have very low minimum monthly contribution limits. Some states have minimum limits as low as $15.Unused funds can be redistributed to other children or saved for future educational endeavors, like a career change.7
Savings in a 529 plan grow free from federal income tax, and withdrawals remain tax-free when used for qualified higher education expenses. It’s also important to note that this traditional type of savings plan will likely be more effective at reaching a savings goal than other popular short-term savings methods, like ones you’ll find on savings apps.7
While it’s undeniable that today’s technological landscape is helping to make money management more accessible, that doesn’t necessarily equal more effective savings. Just scroll the app store, and you’ll find a range of personal finance apps that allow consumers to pay bills, monitor budgets, manage cash flow, and save. But while the automation built into personal finance apps provides consumers with the flexibility to manage their finances, a Consumer Financial Protection Bureau study found the most popular spending rule – rounding up purchases to the nearest dollar and saving the rounded amount, results in a lower savings accumulation than traditional methods. Parents can expect roughly a 1.5 to 3.5 times larger increase in the amount they can save when they use guaranteed savings approaches (like the 529 plan) which rely on more traditional tactics like saving on payday or setting up auto deposits.8
Planning for retirement, funding your child’s college education, or setting them up for financial success boils down to an investing plan. By putting money into stocks, bonds, mutual funds, or real estate, you may be able to achieve your goal of growing wealth over time. The reward for taking on risk is the potential for a greater investment return, but investing without a basic understanding of the market is a recipe for disaster. If you intend to purchase securities such as stocks, bonds, or mutual funds, you must understand before you invest that you could lose some or all of your money.15
The SEC details various investments and can help you decide whether to invest independently or hire a broker or adviser. If you choose to use a professional, you should make sure your broker or adviser is a fiduciary, which means they owe you legal duties to serve your best interest. Not all financial professionals are legally required to be fiduciaries.10
While building wealth and financial planning for your child’s future is no small task, it is a goal worth setting. And it can be achievable with the right approaches, tools, and mindset. Aligning yourself with a trusted financial advisor, getting consistent and strict with decreasing debt, budgeting, starting a savings plan, and investing are all proven methods to create the future you want to help build for your kids. Plus, passing these skills down to your little ones is invaluable to kids of all ages. As you create a plan and pass down financial literacy to your kids, remember that no financial plan is permanent because financial situations are constantly changing. Don’t be afraid to revisit your goals and budgets as your finances change.
