The risk of saving too much for your kids

NEW YORK (Money) -- Question: My son is only four months old, but I want to start saving now to assist him financially in the years ahead. To help pay for his future education, I'm putting $25 from each paycheck into my state's 529 plan.

I'm also taking money out of each paycheck to help with the purchase of his first home and his first car. I plan to increase the amount I save for these goals over time.

Is my plan sound, or should I go about this some other way? - Matt, Altoona, Iowa

Answer: Your question reminds me of a grade-school science fair I attended when my son was in the fourth grade. His contribution was a modest experiment that examined how popcorn stored at room temperature popped compared with kernels that had been frozen. To this day, the point of it eludes me.

As I walked around the fair, however, I was amazed at how complex some of the projects were. They grappled with sophisticated scientific theses, they employed powerful computer systems, they displayed professional-quality Powerpoint graphics - they were all clearly done in large part by the parents, not the fourth graders.

So what in the name of Albert Einstein does this science fair have to do with your question?

Well, I think both are cases of parents trying to do too much for their kids, and perhaps hurting rather than helping them in the long run.

Sure, I'm all for giving a child a leg up in life, but have you considered that you might be going a little overboard here? I can certainly understand wanting to get a head start on college costs, although I'm not sure even that should be a top priority for most parents.

But investing today for a house that your son may or may not want to buy 25 or 30 years from now? And his first car? I mean, unless you're really rolling in the dough, I don't see the point of this.

For one thing, you're diverting resources today toward things your son might not want or need many years from now. For all you know, your son might prefer renting to buying, at least until he's established in his career and has started a family.

As for a car, do you really need to start saving for one a good 16 years before your son is even eligible for a driver's license? And why can't a first car be a hand-me-down from you and your wife rather than one from the showroom floor or used-car lot)?

And even if you've got the cash to spare, I'm not sure saving to cover every major future expense your child might face is a good idea. There's a lot to be said for letting your son deal with this stuff.

After all, learning to support yourself is a big part of growing up. So let him get a job after college, earn some money and do his own saving to buy a house. He'll learn a lot more about the motivation and discipline needed for setting and attaining goals if the savings come out of his pocket rather than yours.

That doesn't mean you can't kick in a few bucks now and then. If you want to help out with a down payment for a house, fine. Even with the recent decline in house prices, young buyers can still have a difficult time coming up with enough scratch to get a foot in the home ownership door.

But even if you have the financial wherewithal, you don't want to make life a total cakewalk for your son. He'll appreciate things like a house, a car and other goodies if he's put in some work and some planning effort to get them. There's a certain satisfaction that comes from riding in a car or living in a house that you worked and saved to buy. I don't think you can get that same feeling from something that's handed to you.

So while I understand the instinct to want to provide for your child, to grease the skids for him, I think you ought to abandon this plan, or at least radically re-think it. Before you start worrying about your son's finances decades from now, make sure you've got your own under control first.

You can start by making sure you've got three to six months' worth of living expenses tucked away in a money-market fund or other safe place. This will help you maintain your family's lifestyle in the event you're laid off or face large unexpected expenses.

After that, make sure you're saving enough for your retirement by maxing out your contributions to plans like 401(k)s and IRAs. For most people, that's going to soak up all or nearly all of their savings.

Once you're sure you're on track toward a secure retirement - after all, you don't want your son to have to support you in your dotage - you can start putting aside money for your son's education in a 529 or other plan.

(Check out the College Funding section of our site for detailed information about savings plans, loan programs and college costs. Don't assume, by the way, that your state's 529 plan is automatically the best way to go.)

But creating financial security for your family today and for yourself in retirement should be your first priority. If you do that - and, of course, give your son plenty of love and attention - chances are good he'll enter adulthood with all the head start he needs.

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