Every parent wants to see their child flourish.
Teaching them about money while they’re young by opening a savings account is a great way to help them mature and become financially responsible.
A child under age 18 generally cannot sign legal documents, even to open a savings account. Parents can, however, open a bank account for their child, and when the child is old enough, let him or her take ownership of it.
The benefits of a savings account for a child are myriad. Among them:
- It teaches them to plan ahead.
- It teaches them to stay focused on goals and priorities.
- It teaches them to wait for things they want until they can afford it.
- It teaches them the value of money and not to waste it.
- They learn basic math skills.
A parent must use good judgment or the benefits of a child savings account can be negated.
For example, giving a kid an ATM card before he or she is accountable enough to handle the responsibility could be a big mistake, especially if he or she loses the card or drains the account.
Learning financial responsibility takes time, so don’t give your child more than he or she is ready to handle.
Here are some things to consider when it comes to opening a savings account for your child.
1. Open a savings account, not a checking account
Checking accounts are for spending money. You’re trying to teach your child how to save. It’s advisable to wait until your son or daughter is a teenager or has a job before allowing them full access to a checking account.
2. Bank at the branch and online
Your child may be tech-savvy enough to do basic banking functions online, but it’s also imperative that they learn proper banking etiquette at a brick-and-mortar location.
Let your kid hand the teller his or her baby-sitting money every week and safe keep the paper deposit receipts while still encouraging online banking vigilance to track how the deposits are growing in his or her savings account.
When your child gets older, he or she will chose their preferred banking method. For a young child just learning about money, the tangible experience of visiting a physical bank reinforces solid financial lessons.
3. Find a bank that promotes financial education
There is nothing wrong with opening a standard adult savings account and having your child put his or her allowance in there. But some financial institutions make saving fun and teach kids good money habits. Ask a banker and check the bank’s website for money tutorials for young people.
The Consumer Financial Protection Bureau website, a financial regulatory and education agency, is also a good place to find information on this topic.
4. Look for the highest yields
Search for high-yield savings accounts. Credit unions and online-only banks typically offer the best rates, but don’t just shop for rates. Accounts with the highest rates may not have other features you may want, so balance your needs.
5. Avoid account fees and ask about features
Some banks and credit unions will waive monthly fees and minimum-balance requirements if the account is for a minor child. Ask about account perks and features, such as an ATM card.
6. Choose the best account for saving for college
Most parents can’t afford to wait when it comes to saving money for their child’s education. The average cost to send a child to a public, in-state, four-year institution is $10,230 per academic year, according to the College Board. It’s $35,830 for a private, nonprofit four-year school.
There are a variety of ways to build up savings for that daunting expense. You just have to decide which one works best for your family’s goals and circumstances.
- 529 account: Most college savings are in 529 plans Similar to a Roth IRA, 529 college savings plans allow parents to invest after-tax money into diversified, low-cost stock and bond funds and then withdraw the money tax-free for qualified education expenses.
- UGMA/UTMA accounts: The Uniform Gift to Minors Act and Uniform Transfers to Minors Act are custodial accounts that allow parents, grandparents and others to transfer assets to a minor child. The assets are managed for the child until he or she reaches adulthood. Custodial accounts are considered assets. Therefore, they have tax implications. Be wary of these accounts if you suspect your child may one day need financial aid to attend college — custodial accounts can disqualify a student or reduce how much they qualify to receive.
- Education Savings Account, or ESA: Also known as “Coverdell ESAs,” these accounts get no special tax treatment from the states, but federal taxes are deferred. The IRS doesn’t tax withdrawals as long as they are used for qualifying education expenses. ESAs have little impact on eligibility for financial aid, even if the student owns the account.
Whatever your financial goals are for your child, make learning about money fun. The rewards will pay off handsomely for both of you.