Five Investments in Your Children's Future

When I traded folded clothes and home-cooked meals for a life of my own 30 years ago I was bent on buying a house as soon as possible in order to build wealth and take advantage of the incumbent tax breaks. This was the wisdom of the day, and it was so pervasive that parents with means routinely helped their kids into their first home by supplying a down payment.

My parents were among the willing, and I was able to buy early through an off-the-books loan from the Bank of Dad. Despite some bumps -- vicious housing downturns in 1990 and, well, now -- it worked out. I paid back the money years ago and decades of home ownership have padded my net worth.

Still, I wonder: should I grease the wheels to home ownership for my nearly adult kids? Certainly, I want to help them. But things have changed. Young people are more mobile than they were three decades ago, and these days if you can't stay in a house for at least five years you're better off renting.

Meanwhile, amid the biggest housing bust this century many economists predict housing will not be a booming investment over the next 20 years, and today there are plenty of other ways to take advantage of tax breaks and build wealth through IRAs and 401(k) plans and other attractive savings vehicles.

Count me as a skeptic when it comes to housing doomsayers. Long-term dire forecasts are always a bit sketchy, and even if the market limps along for years there are still good reasons to buy a house. Among those reasons are depressed prices and the lowest mortgage rates in memory, which combine to make housing more affordable than it's been in many years.

Yet as a parent not only advising my older children but also pondering ways to contribute to their financial future with cold cash, I am deferring any thoughts of financing their first home. I'll revisit the idea once they seem truly settled and the housing market has risen from the ashes. That day will come; I have no doubt. But for now I'm leaning toward these more certain nest egg boosters:

• Fund a Roth IRA. Your child can sock away in a Roth as much money as she earns each year up to $5,000. This is after-tax money that grows tax-free. Yes, if housing is a dud the stock market might be as well. But she's got a great shot at decent long-term growth by diversifying and including foreign stocks and bonds. Getting her started early has huge benefits. A person who saves $100 a month between the ages of 25 and 35 and then stops will accumulate $200,000 by age 65, based on an average annual return of 8%. That same $100 per month with the same return, saved from 35 until 65, will grow to only $150,000.

• Fund a 401(k) plan. Your child should start contributing to a company-sponsored 401(k) plan as soon as possible in order to get a head start, save on taxes and capture the full company match. In a first job, it's not always easy to set aside the $5,000 or more that you need to take full advantage of these plans. If the Bank of Dad can fill the gap, it's money that -- largely because of the company match -- will have a more certain return than real estate.

• Pay for an advanced degree. I know, you just finished paying for undergrad studies. If you've got anything left, though, an advanced degree can really jumpstart your child's career. Put a chunk of money in a 529 plan in your child's name. You may get an immediate tax deduction at the state level, but more important is that you'll establish an account to which anyone can contribute and where earnings grow tax-free. This is money that your child can use for continuing education whenever he likes or be easily transferred to your grandchildren when the time comes.

• Pay off debt. Think twice before you bail out an adult child who ran up debts vacationing in Bali or driving expensive cars. Odds are she will just repeat the same destructive behavior. But retiring student loans so that your responsible child can start off independent life debt-free will pay immediate dividends.

• Direct investment. Maybe your nearly grown child has designs on starting a business. Yes, most business startups fail. But an investment in his business clothing, tools, car (if needed for business), education, training or certification will likely have value beyond a busted business venture. And who knows? The kid may even have an idea that works.