Seeing as we just brought our daughter home from the hospital a few days ago (our first child) I thought it would be a good time to start thinking about what big expenses I can forsee in her childhood and the best way to prepare for them. As with any other savings goal, the sooner you start, the better off you are, saving for children is no different.

It's hard to see past the diapers and sleep deprivation at the moment, but early this morning, after she finally fell asleep after a night of activity, I had time to sit down and think about what different types of expenses she'll have between now and when she graduates college. I'm sure I've missed many, and some of you with children will undoubtedly fill me in with what I have missed, but here's what I've thought of:

1) College expenses (About age 18)
2) First car (About age 16)
3) Extra curricular (Every year starting at about age 5)
4) Wedding
5) Clothes/Toys (Every year)

Obviously College eduction is the biggest and first thing that pops to mind, and fortunetly allows about 18 years to save for. At the same time there are many tax incentives for using particular college savings plans. This is something I have researched for a few months now, and have decided to go with a 529 savings plan. I like the 529 because the contribution limits are high, and although I won't be able to contributes as much now I may be able to in the future, and she also has 4 grandparents who are very interested in helping out as well. Also, with the 529, the asset will be in my name and not my daughter's, which means if she decides not to go to college I can take the tax penatly and still have the money, as opposed to a coverdell or other custodial where the child gets the money regardless of if they use it for education. Also, more importantly, the savings will not be considered an asset of my daughter and hence won't have as much of an impact on her ability to obtain financial aid.

2) What my parents did for my two brothers and I was to get us an old, cheap beat up car when we first started driving, and bought us each a new car when that car died (in my case midway through my senior year in high school). I don't think I'll go that far. What I'll plan on doing is buying a car when they turn 16 that will likely last them through college, and then they're on their own. If I'm more financially independant at that point I might change my mind, but for planning purposes I'll plan on buying a used car for each child when they get their license. Again, I know I have at least 16 years to save for this, which screams mutual fund at me. Most financial institutions have target date funds that will progressively get more conservative as the target date approaches. These are meant for retirement, but can really be used for anything. If I choose a fund with a target date of 2020, I will have all the risk managed for me. And I'll sock away a small amount each month into this fund.

3) Extra Curricular activities is a very broad expense, it could be anything. I'm aware of this, but I also know that unless our daughter is a natural born hermit, there will be something that she'll want to do. This could be cheerleading, balet, basketball, violin, or any combination of these. Since I figure this will start at about age 5, and probably increase in cost every year after that, I will likely keep this money in CDs. I will start putting away a certain amount of money every month into a 5 year CD at ING Direct, and increase that amount every year. For example, if I save $50 a month this year, I might up it to $75 a month next year. This will start giving me a monthly income in 5 years that I hope will cover most of her extra activities.

4) A wedding can be a touchy subject for some. Many people feel passionately that people should pay for their own weddings, others feel the bride's family should pay for it, and still others believe the parents of both the bride and the groom should split it. I personally feel the latter is the best solution, since I don't think the burden should be put on the bride's family alone, and usually people get married young and don't have a lot of money. Too many people I know are still paying off their marraige from 5 years ago. While this is my belief, I'm going to prepare for the worst. Worst case scenario, I will be able to afford to give my daughter a nice wedding and write one check to pay it off. Best case, I only pay half the wedding and have a nice sum of change left over to take my wife on a nice vacation. :-) I'm anticipating an average wedding to cost around $40,000 by the time my daughter gets married, and thus will plan for that. Again, I'll choose a fund with a target date of 2025, and will make conservative investments every year after that until she gets married.

5) My daughter is 5 days old, and has already outgrown her newborn clothes. I expect this trend to continue until well into her teens, and the same to happen with toys until she grows out of toys altogether. Since this expense starts now, I will likely set up another savings account at ING Direct and just put away some money every month. I expect the account to grow faster in the short term, because we continue to recieve hand-me-downs from friends and family, but I anticipate this being a pay-as-you-go account in the future.

Please let me know if there's something I missed, I prefer to know about big expenses as far in advance as I can.mortgage calculator