Question: How should new parents think about personal finance?
Carrie Schwab: The same discipline, the same practicalities apply to young parents. The sooner you start saving for your child’s college education, the less amount you have to save to achieve your goal.
The first thing a parent needs to do when they have their child is to apply for social security number. And then consider opening a 529 plan. A 529 plan allows you to save a couple $100,000 in one year, if you like. But you can save in it whatever amount you can save.
The 529 plan typically will invest similar to a target fund. In other words, it will invest appropriately in a mutual fund knowing that in 18 years you will need that money for college.
There is a lot of tax benefits; it grows tax free. Then when you use it when your child is 18 and you take or withdraw it for college, there are no taxes as well. It is a wonderful benefit for parents, because if you don’t have to pay taxes along the way, your money grows even faster. And of course then when you pay 18 years later, you are probably in a better financial position and you would get that tax benefit; you don’t have to pay for the withdrawal for the college education.
Recorded on: March 27, 2008