Yesterday we talked about 529 Plans and Educational Savings Bonds. Today we’ll talk about Savings Accounts and a popularly advertised insurance plan.
There is always the option of the good-old savings account. Shop around to get the best interest rate and the least amount of fees. Some that you may want to ask about are yearly maintenance fees, fees for overdraft, and fees for keeping less than the minimum balance in the account (check to see what the minimum balance is before opening the account.) A similar option is a money market account. They’re pretty much the same thing, and both should be FDIC insured, but the money market account yields higher interest although you are more likely to run into fees and have a harder time withdrawing your money. (Update from jlcollinsnh–accounts are FDIC insured up to $250k.)
Another way to get a higher interest rate on your savings is to open either type of account online, either through your brick and mortar bank or a bank that only operates via internet.
I’m not going to pro and con this one because it has all of the same pros and very few cons, but Coverdell Educational Savings Accounts are a third option. The only cons are that you can only deposit $2,000/year, and the market has the potential to go down, but taxes on interest are deferred until your child goes to school. Then, you will only pay taxes on any interest that exceeds tuition payments. So you’re most likely going to be gaining interest tax-free. You also have the option to pull these funds to use toward educational expenses starting in Kindergarten, which is flexibility other paths don’t offer.
Traditional Savings Accounts
- less likely to have fees associated with the account
- less likely to have a minimum balance
- generally can make withdrawals any time you want as frequently as you want (though you should check with your bank before opening the account)
- interest rates are seriously low, especially right now
- because of the liquidity of the account, you may have to exercise more discipline to not spend your savings
- interest is taxable regardless of what you intend to use the money for
Money Market Accounts
- higher interest rates
- FDIC insured…your money is not going to disappear
- more likely to require a minimum balance
- more likely to have fees associated with the account
- can only make a limited amount of withdrawals a month (ex. 3) before incurring fees
- interest is taxable
Gerber Life College Plan
This one sounded so great to me. Essentially, you’re buying a life insurance policy for yourself, and as long as you have paid all the premiums your child will get the full policy amount for college when they reach the appropriate age (assuming you haven’t died.) The biggest selling point to me was that your money wasn’t going to disappear because of volatility in the market because you aren’t investing it. I’m not a huge risk taker. I know I have terrible luck. I don’t want to push it.
Then I read this article from The Wall Street Journal’s Market Watch. The author convinced me this was not a good plan to invest in. He explained that it’s an endowment life-insurance plan which is really not uncommon. What Gerber has done is market their product to parents wanting to save for their children’s education when really, just like any other similar insurance policy, the money that will be paid out can be used for anything. The returns that you get for your investment are minimal, as the author breaks down the cost and outlines other ways you can invest/save your money for your kids with better returns. I’d highly recommend reading it.
|Love their baby food, though!
Although I have no idea if that’s
what this stock baby is eating…
- you are not investing your money, so you are guaranteed to see a return (this is the same for a savings account or bond, though)
- you also have a life insurance policy in case you die before your child turns 18 (there are more affordable life insurance policies out there…shop around before making this your deciding factor)
- interest is 100% taxable
- interest is low
- Gerber’s marketing a product to what you want and need. Not really a con. Just makes me feel like they’re trying to take advantage of me. And I don’t like that.
Have you already started saving? What have you done and do you have any tips for those just starting out?