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As a parent, one of the best things you can do for your child is to give them a head start on his savings plan. Your child doesn’t know it yet, but he will need a lot of money for college, a future wedding, his first home, and for starting a family of his own. By putting away money now, you can take advantage of compound interest. You don’t need to save a lot. You just need to employ simple, and efficient, strategies.
Whole Life Insurance
Whole life insurance isn’t the first product that you might be thinking of when you think of a good investment. However, a properly designed whole life policy builds substantial cash value over time that is guaranteed and income tax-free. Instead of opting for traditional whole life, look for a limited pay policy. Specifically, a 10 or 20 pay whole life from a mutual life insurer that pays dividends to the policy. These types of contracts emphasize cash value accumulation. The cash values act as a savings he can use whenever he wants while the policy also provides a death benefit that will grow over time for your child. This policy might even eliminate the need for future life insurance for your child.
Whole life insurance allows you to borrow money against the cash value, similar to how you would borrow money against the value of a home. The difference with whole life is that the loan does not require any kind of credit check or formal approval. You simply ask for the money. The insurer secures the loan with money that already exists inside the policy contract. Some insurers also continue to pay interest on the cash value in the policy as though no loan was ever taken out. This type of loan arrangement is called “non-direct recognition,” and could make a dramatic positive impact on your child’s future financial situation.
Treasury Inflation Protected Securities are a type of government bond that keeps pace with inflation. When you invest in this type of financial product, you eliminate the drag of inflation. While TIPS don’t pay much in the way of interest right now, they will preserve your child’s future savings. These products are incredibly efficient and effective at battling inflation and are guaranteed by the U.S. government.
Because TIPS are backed by the federal government, you should expect them to pay the stated interest rate and mature without any problems. The major risk with TIPS is that the government will default on its debt obligations. It’s not literally impossible that this will happen but it’s unlikely.
State 529 plans are a double-edged sword. On the one hand, they offer you and your child a convenient way to save money for her future college expenses. On the other, if the child doesn’t use the money for college, the government taxes (and assesses a penalty) on all of the money in the account. The plans may or may not be efficient depending on the investments you choose, however the most efficient investments in the account will always be index mutual funds. These funds eliminate the transaction costs that are so common with actively managed funds. Because index funds track a market index, instead of trying to beat it, the fund makes few trades and thus minimizes costs to you.
This is a guest post contributed by Liz Goldman, a freelance financial writer, on behalf of Sunbird FX (http://www.sunbirdfx.com/) – the experts in forex and trading oil futures. All views and opinions expressed are those of the writer and do not necessarily represent Sunbird FX.