How to Set Up a Baby Savings Plan for Your Clients

Landing younger clients has become the Holy Grail for advisors, given demographic trends and a massive U.S. generational transfer of wealth, which could amount to $59 trillion, according to a Boston College study.

While financial advisors are stepping up to the plate to court new, younger clients, they’re swinging and missing more often than not. Yet only 42 percent of clients currently work with a financial advisor, according to Advisor Authority, even as millennial net worth will rise from $4 trillion in 2015 to $20 trillion by 2030, according to Deloitte.

One way money managers can get in the good graces of younger financial consumers is help them tackle a thorny, but under-targeted, financial need – saving for the cost of raising a family.

For starters, both advisors and young families face an uphill climb right out of the gate. After all, putting a dollar sign on a new addition to the family is a tough task. Focus tends to fall on the love, nurturing, and family moments that usually appear in abundance between parent, family and child.

But there actually is a dollar sign on the cost of a child, and it’s a big one that doesn’t even include the high cost of college. Data from the U.S. Department of Agriculture shows that a child born in the U.S. in 2013 will cost $245,340 to raise from birth until age 18.

The agency cites food, housing, childcare and education, and other child-rearing expenses as the primary financial obligation facing parents.

“Costs associated with pregnancy or expenses occurred after age 18, such as higher education, are not included,” the agency stated.

On a yearly basis, the USDA pegs child-rearing expenses per child for a middle-income, two-parent family from $12,800 to $14,970. Of those expense categories, which ones count for the most?

According to the agency, specific child-rearing costs, as a percentage of total expenditures, break down as follows:

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Category    Cost %

Housing    30%

Child care/non-college costs  18%

Food    16%

Transportation    14%

Health care    8%

Miscellaneous    8%

Clothing    6%

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Building A Battle Plan

So how does a financial advisor help a proud, yet prudent, parent pay for all of these costs? By being prepared and having a plan.

Unfortunately, that’s not happening – at least not in large numbers.

To turn that situation around and get a solid child savings program in place, planning parents really do need a plan. Advisors recommend the following steps:

Create a strategy: Economists Joseph Durkan and Moore McDowell advise parents planning a family to build a financial staircase, and fast. “Parents must have a savings strategy,” they advised. A long-term savings strategy should mimic a retirement savings plan. “(Retirement) planning is an obvious example, but there are many other plans that parents should consider. Also, insurance in various forms is central to such a family savings strategy.”

Save your raises and bonuses: There’s no law that says you have to spend a raise, bonus, or a windfall in the form of an inheritance. So when unexpected cash heads your way, resist the urge to splurge and stash it in a bank account. Better yet, a bank certificate of deposit for a year or more, to eliminate the odds you’ll spend your largesse.

Pay yourself first: When you’re building your newborn nest egg, shave 10 percent or so off your household budget, and instead, steer the cash into a special banks savings account. Have the money deducted from your paycheck automatically (most employers and banks offer such transactions). Make up the savings with two or three fewer dinners out over the course of the month, lower-tiered cable packages (or cut cable out altogether), and a more frugal mobile phone plan.

Stash money away every month: before and after having a child, said Michael Minter, founder of  Mintco Financial, in Tampa, Fla. “For young families planning to have a baby in a couple of years, we advise saving 10 percent of their salary,” he added. “Also, you should review your priorities. Check where you can cut expenses or rethink your lifestyle.”

Keep credit usage to a minimum: To save for your fledgling family, avoid excessive credit card debt, and the ultra-high interest rates that inflate those payments. Instead, pay down your credit cards, paying off the higher-interest rate cards first. When the card account is near zero (don’t pay off the card completely, that negatively impacts your credit score), use the money saved to beef up your family savings plan.

Take a long-term approach in housing: By all means, keep saving for a first home, one step at a time. The Great Recession is in the rear-view mirror, and U.S. homes appreciated by 5.5 percent from September 2015 to September 2016. Having a comfortable home that appreciates in value is a good investment for any young family.

Just do so smartly. For example, moving into a good neighborhood, with access to solid schools and public transportation is doable if you aim for the lowest-priced house in the area. Leverage websites like Zillow.com or Realtor.com to find the best price comparisons.

Keep your eyes on the details: Once your child savings plan is up and running, keep your eyes on the prize, and get even more budget conscious. Avoid high-end baby clothes and toys as you start your young family.

Over a few years, you can save thousands of dollars by avoiding the malls and high-end retailers and buying second-hand clothes, toys and, when the time comes, refurbished video games and computers. Also, buy household items in bulk, and save on both gasoline and food costs with less trips to the store.

Take advantage of tax breaks: There are myriad child tax breaks in the U.S. tax code. The IRS offers the Child Tax Credit, the Earned Income Credit, and Child and Dependent Care Tax Credit, to qualified families. Combined, they can add up to thousands of dollars to your family savings fund. Talk to a qualified tax accountant to get all the tax breaks you’re allowed.

Save for emergencies, too: “Every couple or parent should have an emergency fund of three-to-six months of their gross budget  - before having a child,” said Gary Duell, president of Duell Wealth Management in Happy Valley, Ore.

Keep Going

After your child is born, continue to save wisely by taking advantage of other budget savers, like babysitting co-ops, which enable parents to trade cash or calendar time for child care services.

To further cut costs, check with your employer about flex-time work scheduling that can keep you home more, with your child, thus saving further on child-care expenses.

Also, don’t forget to protect you, the income earner, so your kids can keep financially stable in the event in the loss of a parent.

“Taking the time to protect the parents is critical and too often overlooked,” said Joseph Templin, managing director at Lamp of Castle Holdings in Ballston Spa, N.Y.

A $2 million term insurance policy will produce about $4,000 a month of income, adjusted for inflation, for the entire life of that future child.

These aren’t the only child-savings care options, but they should be at the top of your list. After all, the last thing you need when preparing to build a nice, loving family is to worry about money.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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