The biggest moments in life – first car, graduation, wedding and funeral – all have one thing in common: they all come with bills. Bills for auto insurance. Bills for university. Bills for the caterer and have you seen the cost of a casket?
While some of these expenses are best saved for later, some you can start saving for from the beginning of your child’s life. How much is appropriate to save and when to start? How to predict what things will cost 18 or more years in the future? What if you don’t save enough? There are simple guidelines that can help you get started and that take some of the guesswork–and anxiety–out of saving for your child’s future.
Each family decides what is most important to them. For some, it is education above all else. For others, an elaborate and traditional wedding. Some families want to be sure their teen has the newest, safest car to drive around town. All of these are legitimate concerns, list your family’s priorities in order of importance and determine which percentage of savings you wish to dedicate to each.
Decide What You Can Afford
Unless you recently planted a money tree in your backyard, chances are you have a limited amount of funds from which to draw savings. Once you have decided what your savings priorities are, you must calculate how much you can afford to allot to each. For guidance, consider the following:
- Prices on used cars rose 6% in 2008, and while prices have since remained fairly stable, the average safe, reliable used vehicle now costs around $18,000. And expect auto insurance for a teen driver to increase your premiums by at least $1,500.
- University tuition varies by region. Ontario students pay the highest fees (just above $6,000) and students in Labrador, Newfoundland and Quebec the lowest (around $2,500). The national average for 2010/2011 was around $5,000, 4% more than the previous year. Add books and living expenses and the typical student pays $14,500 a year.
- In 2011, the average cost of a wedding in Canada rose to just over $23,000 from $20,000 in 2010, according to a survey of Weddingbells Magazine readers.
It may be that you can save enough to cover all these expenses in full, while accounting for inflation – but for most, it will be a partial contribution. Depending on what amount you are able to save, it is okay to tell your child that you can pay half the cost of a used car. Or that you can give $5,000 a year toward university expenses. Or that you have saved $10,000 for the wedding, and any additional costs will be borne by the happy couple.
Save Now or Borrow Later?
The choice to save now and thus borrow less later may not be yours to make, some families simply do not have the income to spare. If there is any amount you can afford to set aside on a weekly, monthly, or even annual basis, do so. Don’t forget the power of compounding interest: the sooner you begin to save, the better for the greatest return. For example, if you save $5,000 a year starting at age 20, you will have nearly $2 million by retirement age. But if you start to save at age 40, your annual contribution will have to be $25,000 to achieve the same result. By the same measure, if your child borrows $5,000 a year to help pay for college, they will pay at least another $5,000 in interest payments over the life of the loan, which is money they could be investing in their own future. Even if you cannot save enough to meet all your goals, do not let that deter you from saving what you can.
We want to be able to give our kids everything, but perhaps the most important contribution you can make to your child’s future is fiscal responsibility. Whatever you save, talk to your children about money, about what things cost, and about the value of saving versus spending. Too many of the messages your children will hear and see on TV tell them to spend now and worry later. Teach them instead the satisfaction that comes from setting and achieving financial goals.