Opening a savings account for your child is a great way to teach them about money management at a young age and help them start saving for their future. This guide discusses the benefits of opening a savings account early, the options available to you and how to choose the right kids’ savings account. It also provides a step-by-step breakdown of how to move forward with opening an account and tips on managing it responsibly.
What is a Kids Savings Account?
As the name implies, a kids savings account is a type of bank account designed specifically for children. There are also accounts you can use to save for college or to house assets, like real estate and other financial investments, on behalf of a minor. More on these shortly.
The Benefits of Starting Savings Early
Teaching your child to save early can benefit them for a lifetime. Here’s a closer look at some additional perks.
Teaching Kids About Saving Money
By opening a savings account, you provide a way that demonstrate how money grows over time. You can deposit money regularly into their account and educate them on how interest works as they watch their balance increase.
Importance of Financial Literacy
Ensuring your child is financially literate at an early age is also vital. You can instill the right habits into them while providing key insights to help your child establish the right mindset about money, even before they hit the real world. Doing so can pay significant dividends and help them establish a solid financial foundation when entering adulthood.
Creating a Savings Plan
By opening a savings account early, you can also educate your child on the importance of building an emergency fund. More specifically, teach them to allocate a portion of any money they receive, whether from a gift, allowance or job, into their savings account. Explain why it’s important to have money for a rainy day and how setting short-term and long-term savings goals to make larger purchases is a smart strategy.
Setting Savings Goals
To piggyback off the last point, if your child wants to make a specific purchase but doesn’t have all the cash, they can set savings goals. This tactic can motivate them to deposit money regularly and think carefully about how they spend money. More specifically, it provides a sense of accomplishment while educating your child on the reward that comes with delayed gratification.
Rewards and Incentives for Saving
Create a reward system that recognizes your child’s saving efforts, such as matching a certain amount they save or giving small bonuses when they hit saving milestones.
Celebrating their achievements, however small, reinforces the habit of saving and makes them eager to continue saving for years to come.
Types of Kids Savings Accounts
There are four types of kids savings accounts to be aware of.
Basic Savings Accounts
Basic savings accounts are offered by traditional banks, credit unions and online banks. Often, they are the first bank account most children have and typically come with no monthly fees and little or no minimum balance requirements. And your child will likely earn a return on their money.
Note: This article will focus primarily on basic savings accounts.
Custodial Accounts (UTMA/UGMA)
UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) are custodial accounts that allow you to save for your child’s future. They often yield greater returns than savings accounts and can house a variety of investments. The assets in these accounts are legally bound to the child and often taxed at a lower tax rate.
Joint Accounts with Parents
Joint accounts are owned by both you and your child. They allow you to monitor and control account activity while teaching your child financial responsibility. Many financial institutions offer these accounts minus the monthly fees.
College Savings Accounts (529 Plans)
529 plans are designed specifically to save for higher education expenses. Unlike standard accounts, they feature tax advantages, including tax-free growth for withdrawals made to cover qualified education expenses.
How to Choose the Right Kids Savings Account
If you aren’t sure which kids savings account is best, consider these factors to help you make an informed decision.
Interest Rates and Fees
The annual percentage yield (APY) determines how much your child’s savings will grow. Ideally, you want an account with a competitive APY, but it should also feature few or no fees to maximize savings.
Accessibility and Online Banking
Most accounts offer online banking that makes it easy to check balances, transfer funds and even set up automatic deposits. The option you select should also have a user-friendly mobile app to keep tabs on the account while on the go.
Minimum Balance Requirements
Accounts with little or no minimum balance requirement are most ideal, as they make it easier to start saving without needing a large upfront deposit. If you’re leaning toward a basic savings account, steer clear of those that penalize you if your balance falls below a certain level. These fees could quickly add up and eat away at your child’s savings.
Parental Controls and Oversight
Parental controls are vital for managing your child’s spending and saving habits. Accounts that offer features like transaction monitoring and spending alerts can help you keep track of activities. You may also be able to set specific savings goals and restrict access to funds to help your child stay on track.
Steps on How to Open a Kids Savings Account
Once you’ve decided on the right savings account for your child, here’s how to move forward.
Gathering Necessary Documents
You’ll typically need your child’s birth certificate, Social Security number and a copy of your photo ID. These documents can usually be uploaded when you apply to open an account.
Choosing the Right Bank or Credit Union
Shop around to find a bank or credit union offering a kids savings account that fits your needs. Be sure to compare APYs, fees, account features and other resources each offers. Select the best option and formally apply for an account. Some let you apply online; others require visiting a physical branch.
Setting Up Account Access
Since your child is a minor, you’ll need to designate yourself as the custodian of the account. Once they turn 18, your child can operate the account independently and upgrade to a more age-appropriate account. You’ll also need to make the minimum required opening deposit (if applicable).
Monitoring and Managing the Account
Once the account is open, here are some tips to help you effectively manage it alongside your child.
Parental Controls and Security
You can use these controls to monitor account activity and set spending limits.
Regularly Reviewing Account Statements
It’s vital to review account statements as you receive them to confirm all transactions are accurate. If you find discrepancies, contact your financial institution promptly.
Encouraging Regular Deposits
Encourage your child to make regular deposits into their savings account. You can do so by automating deposits for a portion of their allowance weekly or monthly. You can also encourage them to deposit a portion of any gift proceeds received into their savings account.
Adjusting Savings Goals as Needed
Savings goals can change, so you want to adjust milestones accordingly. Help your child set realistic, achievable goals based on their unique needs and aspirations.
Legal Considerations
Be mindful of the laws that govern custodial accounts and understand the responsibilities of parents or guardians.
Conclusion: Encouraging a Lifetime of Good Financial Habits
You can set your kids up for financial success by teaching them to start saving money at an early age. Encourage your children to set clear savings goals and make regular deposits. It’s equally important to engage in discussions about banking and financial management and celebrate the small wins.
