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Estate Planning Strategy: How to Start Savings for Grandchildren

Last update on: Jun 23 2020
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What is the best Estate Planning Strategy to get your grandchildren started on the right foot financially? Most people get the answer to this question only half-right.

A goal of many grandparents’ estate planning strategy is to provide some financial support for their grandchildren. Some grandparents use the ri estate planning to put aside money for college education expenses. Others set up trusts, custodial accounts, or other funds. Sometimes the fund is set up as soon as possible; other times it is set up in the will.

While it is nice to establish a legacy to help the grandchildren, that is only a partial solution. Whatever money you set aside eventually will be spent, and only a few of you are able and willing to leave the grandchildren enough to satisfy their lifetime needs and ambitions. You can help by establishing a fund that relieves them of some spending responsibility. It will be for naught, however, if another step is not taken. To be financially secure, the grandchildren must learn to build up their own capital.

The grandchildren must learn to save and invest, and saving is the most important step.

One way to help them save is education. An excellent gift is the book, The Richest Man In Babylon by George S. Clason. The book is a collection of stories and parables set in ancient Babylon. They were written to teach people why to save and how to save. The first of these stories was written in 1926, and since then they have helped many people down the path to wealth. It is available as an inexpensive paperback in most bookstores. It cannot hurt to give it to the grandchildren.

Another book to consider giving is Debt-Free By 30 by Jason Anthony and Karl Cluck (Plume Books; $12). Using contemporary examples and the flip language youngsters like, the book gives basic advice the kids won’t accept from you and their parents. It explains to a young person how to get out of debt or stay out of debt, buy a home, and buy insurance, among other basic financial steps. Maybe your grandchildren will follow it part way and get debt free by 40 or 50. That would put them ahead of most people.

A reason most Americans don’t save enough is that saving is equated with pain and deprivation. When most people try to save, they go too far and cut out too much. There needs to be room in a budget for the occasional luxury and moments of leisure.

The key as Clason points out is to pay yourself first. Instead of setting up a budget to save as much as possible, the grandchild should determine how much income is coming in and immediately save 5% to 10% of that. The rest of the income is available to spend however the grandchild wishes. That simple change in emphasis dramatically increases saving.

This saving is easier to do if it is forced. Most people save only in two ways. They save for the equity in their homes because they are required to make a monthly mortgage payment. (Even then, many people refinance to take out part of their equity.) The other way people save is through 401(k) plans at work.

The common denominator of these two savings plans is that they are forced savings. Fall behind on mortgage payments and the lender eventually will foreclose on the home. Set up a 401(k) savings formula and it automatically is deducted from the paycheck. The worker never sees the money. Social Security also is a form of forced saving.

The key for getting your grandchild ahead of most people is to add other forced savings programs.

Most brokers and mutual funds have automatic investment programs (AIPs). Complete the paperwork, and the financial firm automatically takes a fixed amount of money out of your checking account and invests it according to the advance instructions. The investments can be changed at any time, often over the telephone or through a web site. The key is that a decision is made one time. Otherwise, each month two or three decisions have to be made: How much can I save this month? Should I write the check now? How should it be invested? All those questions lead to procrastination, and that is why many people don’t save enough.

Giving the grandchildren financial resources through your estate planning strategy is a good and generous thing to do. You can help the grandchildren even more by showing them how to build up their own resources the way you did, so that they can provide more for themselves and perhaps for their own grandchildren. Teach the grandchildren how to save and encourage them to use an AIP program from the time they start receiving paychecks.

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