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How much money should I save for my children?

November 24, 2011

The amount of money you should save for your children depends on the desired goals for that money. People want to provide for their children in many different ways and its the overall picture which you need to plan for.

Having children brings great responsibility as well as great reward. When most people think about parenting, they consider tending to children’s physical, emotional, and psychological needs. However, considering your children’s financial future and needs should be an important consideration as well. Paramount in this planning is the decision of how much money to save for your children.

Why do I need to save money for my children?

You may choose to save money for your children in order to be prepared for either of two possible events. The first is the event that you become unable to provide for your children while they are minors. The second is the choice to provide an inheritance for your adult children’s future. These are two very separate issues, so each should be considered carefully and independently.

Saving money to provide for your children in the event of your death or loss of income during their minor years is crucial. In many instances, life insurance or disability insurance may help to provide for your children if something were to happen to you. However, this might not be enough. It is wise to consider additional savings in the event that your children need financial support should something happen to you.

Saving money to provide an inheritance for adult children is a preference rather than a necessity. Many parents feel that this is an important gift or legacy to leave to their children, while others consider it unnecessary. This is a very personal decision that only you can make. If you do choose to provide financially for your children after your death, you will want to have a financial plan for this gift well in advance.

When should I start saving money for my children?

As with most financial planning matters, the sooner you start saving, the better! There is no reason to wait until your children are older to start saving for their future. In fact, the earlier you begin, the more you will be able to accumulate in compound interest and reinvestments. Making sure that your minor children are provided for in the event of your death or loss of income should be a primary priority. Ideally, this is a situation you would want to have planned for even before your children are born.

Saving money for your children’s inheritance, however, may be less pressing. When your family is young, it may be more beneficial to focus on other goals, like saving for college or paying down the mortgage. A good financial

planner can help you prioritize your savings goals and map the timeline of your savings plan.

How much money do I have to save for my children?

A number of factors will influence the amount of money you save for your children. Calculating the amount of money you will need for minor children in the event of your death or loss of income should be straightforward.

Consider all the costs of raising your children until they reach a self-sufficient age, housing, food, education, and basic living expenses, to name a few. Next, subtract from this the amount of money your current savings, life insurance, and/or disability insurance will cover. The difference between these two amounts is the minimum amount you should plan on saving. Of course, it is never a bad idea to have even more of a financial cushion, just in case.

Deciding how much money to save for adult children’s inheritance can be more complicated. Here are some factors that might come into play in your decision:

  • Funeral costs: Although it may seem morbid, having your funeral expenses and arrangements planned in advance can be a tremendous gift to your family at a very difficult time. Set aside the funds to cover these costs, and make sure that your wishes are clearly outlined or pre-arranged.
  • Estate costs: Regardless of the size of inheritance you choose to leave, you probably don’t want to saddle your family with the cost of settling your estate. Your attorney should be able to help you calculate these out-of-pocket costs, taxes, legal fees, etc. that you will want to provide for.
  • Taxes: You may choose any amount that you would like to gift to your family after your funeral and estate taxes are covered. However, remember that your family will not receive the total amount that you have saved. Talk to your financial planner about projected inheritance taxes to understand how much of your gift will actually be received by your children.
  • Future Value of Money: Once again, remember that the earlier you start saving, the better off you will be. Take into account how much the money you are setting aside will be worth based upon expected rates of return and the amount of time you can allow your savings to grow.

It can be difficult to think about planning your estate, and even harder to talk about. However, doing your research and having frank conversations with your family, your attorney, and a financial planner can be enormously beneficial. Proper forethought and planning can help you decide and execute exactly how much money you should save for your children.

Alan Dunn

Written by Alan Dunn – one of our highly talented and underpaid writers. For more information on Alan follow him on Twitter or Google Plus

Category: Personal Finance

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