Baby Bonds: A Guide To Saving For The Future

If you’ve read a few basic personal finance articles, you’ll soon come across the power of compound interest. Often, an article will show that contributing a little money consistently from ages 25 to 35 and stopping yields a bigger retirement net egg than contributing from ages 35 to 65. It doesn’t sound like contributing ten years should be worth more than 30 years, but that’s often how the math works.

Whenever I see graphs like that, I think, “If starting ten years earlier makes such a big difference, imagine what starting 25 years earlier would do!”

That’s the rough idea behind baby bonds.

What are Baby Bonds?

Baby Bonds are government-sponsored savings accounts for newborns. The idea is that each newborn would receive a seed deposit from the government, which would grow over time thanks to compound interest. The funds in the account would be available for the child to use when they reach a certain age, typically 18 years old, for expenses such as education, buying a home, or starting a business.

The purpose of baby bonds is to promote financial stability and security for families, particularly those with lower incomes. The hope is that by providing a financial foundation for children, they will be better equipped to pursue their goals and overcome financial challenges later in life.

Baby bond programs are starting to be developed now. Each program has different specific details, such as the amount of the seed deposit, the interest rate, and the conditions for withdrawing funds.

Which States Offer Baby Bonds?

Starting July 1, 2023, Connecticut will be the first state to offer baby bonds. There are a lot of little details, so if you live in Connecticut, I recommend reading the official baby bond documentation. For everyone else just trying to understand how it works, the state will deposit $3,200 at birth into a baby bond trust invested by the Office of the Treasurer.

At age 18, a young adult can withdraw money to start or invest in a Connecticut business, buy a home, pay for higher education, or save for retirement.

The participating young adult must complete a financial literacy course to be eligible for the money. If you are reading this website right now, you will likely have no problem with that.

Massachusetts may be next to offer baby bonds

How Much Will a Connecticut Baby Bond be Worth?

Typically the stock market returns 8% a year. Using the Rule of 72 (as explained here, the money should double every nine years. That means the $3,200 will likely double to $6,400 and then to $12,800 at age 18 – or $25,600 at age 27. In reality, it may turn less than that because I expect the Office of the Treasurer to invest in very low-risk investments. So I would put the target at between $10,000 and $20,000 depending on when they are withdrawn to be used.

What the Difference Between Baby Bonds and a 529 Plan?

Some states offer to give babies money for enrolling in a 529 Plan at birth. A 529 Plan helps save for college expenses. Typically states will provide a small incentive such as $50 or $100. Baby bonds are significantly more and can be used for much more than just college expenses.

How do Baby Bonds Help Fight Poverty?

Baby Bonds programs help fight poverty by giving young adults a head start. Having assets, such as savings accounts, can help families weather financial shocks and provide a safety net during times of need. Furthermore, by requiring financial literacy courses, young adults will have more tools to lead them to financial success.

It’s important to note that while baby bonds may be a valuable tool in addressing poverty, they are not a silver bullet solution. They must be combined with other initiatives and policies to reduce poverty.

Final Thoughts on Baby Bonds

People can’t depend on the government for baby bonds today. Even in the future, the money to fund the program will need to come from somewhere, which likely means higher taxes.

In the meantime, the only thing you can do is fund baby bonds yourself. Unfortunately, parents don’t typically have thousands of dollars to put aside when a baby is born. It’s often quite the opposite, with many baby expenses coming all at once. It should go without writing that it’s also useless to fight poverty if one has to have the wealth to save for them in the first place.

If you are fortunate enough to have the money, and your kid has some income (when they are older than babies), you may want to look into kid Roth IRAs as a way to do something similar to baby bonds.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

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