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9 Ways To Save Money for Your Kids

Setting your children up for success early in life can be as simple as opening a special savings account for them. With careful planning, by the time your kids turn 18, they could have a substantial fund to cover college tuition, purchase their first car, or even kickstart a small business. Read on to discover the best saving strategies tailored to your situation and where to start.

Key Takeaways

  • Open a savings account for your child to accumulate funds and teach them the value of saving.
  • Consider investing in a 529 plan for a tax-advantaged option.
  • Use apps like AdVenture Capitalist and NatWest Rooster Money to teach kids about saving and investing in a fun and educational way.

What Is the Best Way To Save Money for Your Kids?

The best options to save for a child include opening a dedicated savings account, investing in a 529 college savings plan, or setting up a custodial account.

A savings account provides simplicity and accessibility, while a 529 plan offers tax advantages for educational expenses. Custodial accounts allow minors to own securities with a custodian's guidance.

Additionally, a Roth IRA can be beneficial if your child has earned income, providing tax-free withdrawals in retirement. High-yield savings accounts and automatic transfers can also be effective tools.

Lastly, educational savings bonds can be a reliable choice for educational purposes. Consulting a financial advisor can help tailor a savings plan that suits your objectives and preferences.

Benefits of Saving Money for Your Kids

If the benefits were not obvious, here are some things to consider about saving for your kids:

  • The money that you have managed to set aside for your kids can be used by them to start their own savings account that would ultimately help them buy a car or a house, for example.
  • Saving money for your kids can become an amazing learning opportunity. While you’re sticking to your plan, make sure to include your child in the process.
  • Some parents choose to save money for their kids only if a disaster strikes. It is easy and prudent to create an inheritance fund or a will to make sure that nothing happens to your children in case you will no longer be there for them.
  • Finally, the cash that you set aside can later on become your kid’s emergency fund. A financial cushion makes life a bit easier, and anyone with a reserve fund is much more confident in their future. Even if your child doesn’t end up taking a penny from the stash, it might have a tremendous impact on his life.

How To Save Money for Your Kids

There are many ways to save for your kids, but investing in a 529 college savings plan is the fastest and most widely used option. Here are some steps to take before you decide on a given route:

Step 1: Make a Financial Plan for Your Child

Sit down with your partner or anyone else who is involved in your finances and child’s life and decide on what goals you would want to achieve with the help of your kid’s financial plan.

Here are a few questions that you would most likely have to talk over:

  • Do you want to create a savings account to help pay for your child’s first car? Education? Room and board?
  • If you haven’t yet come up with a will, you would have to select the age of inheritance and decide whether or not your kid would inherit the money in one lump sum or a few different installments.
  • Decide when and how you’re going to explain to your child what the savings account has been created for and how you expect the kid to manage it.

Step 2: Set Up an Account for Your Kid

Some banks would require children to reach a certain age before they would be allowed to have a savings account opened for them. However, there are financial institutions without any age restrictions.

In any case, before opening an account, you would have to pay attention to:

  • Interest rates
  • Monthly maintenance fee
  • Minimum opening deposit
  • Minimum balance requirements

Some banks would allow you to open such an account online by simply uploading the child’s birth certificate, social security card, passport, or driver’s license.

Do bear in mind that the parent might be required to have an existing account before opening a separate one for the kid. 

Step 3: Budget Money for Your Child

Ideally, you would want to decide on a certain amount and have it automatically transferred to your child’s savings account every time you receive your paycheck. In such a way, you won’t forget to make the necessary payment, and the overall amount will be growing without you even actively thinking about it.

Step 4: Plan When To Hand the Account Over

If you’re not going to use the savings account for a specific expense (like buying a car), it will be transferred over to your kid once he or she reaches 18 years of age.

Most banks would automatically convert a child’s savings account into a traditional savings account once the individual turns 18. Usually, the account owner would have to choose to either continue saving or close the account and withdraw all the funds.

Make sure to talk this through with your kid beforehand.

9 Ways To Save Money for Your Kids

We have focused on a few options like 529 plans and trusts, but here are even more ways to save money for your kids:

1. Create a Children's Savings Account

Most banks would allow you to co-own a savings account with your child.

By regularly transferring money to the savings account, you’ll not only make sure that your kid has a small fortune accumulated by the time he reaches 18, but you’ll also help the child develop the habit of saving.

Such accounts can typically be moved into teen checking accounts, once the youngster finds a job, but you would remain the co-owner of the account until the kid is no longer a minor. 

2. Leverage a 529 College Savings or Prepaid Tuition Plan

A 529 plan is one of the most effective ways to encourage saving for future education costs.

You can opt for either a general college savings or a prepaid tuition plan. The main benefit of the latter is that it locks in the current rates for various public institutions. But a general college savings plan offers a lot more flexibility.

In any case, you would have to make sure that you are familiar with all the limitations that such a plan implies as withdrawing money from the plan for non-qualified purchases might lead to penalties.

3. Use a Roth IRA

Though a Roth IRA is an individual retirement account, with the right planning, you might be able to use it to cover your child’s expenses.

Here are the main things that you would have to bear in mind:

  • If you’re planning on depleting your account, ensure that you have another source of savings for your retirement.
  • Your contribution may be limited based on your income and filing status, but you might be able to use a backdoor Roth IRA strategy to get access to the accounts.
  • Teens can open their accounts as soon as they start earning money.

4. Open a Health Savings Account (HSA)

A health savings account allows you to save money to pay for qualified medical expenses. The money is tax-deductible and grows tax-free. Furthermore, it can be withdrawn tax-free to help pay for certain medical expenses not only for you but also for your child.

Bear in mind that you can contribute only if you have an HSA-eligible plan. 

5. Look into an ABLE Account

ABLE accounts are tax-advantaged savings accounts for disabled individuals and their families.

An annual total of $17,000 can be contributed to the account. One important thing is that such accounts do not count against any form of government assistance which is a huge plus.

6. Open a Custodial Account

While a children’s savings account is typically a joint bank account, a custodial account is an investment account that an adult can set up for a minor (all the funds contributed belong to the child and are irrevocable).

There are two types of custodial accounts:

  • UGMAs allow you to buy stocks and bonds
  • UTMAs allow you to invest and transfer any property

7. Set Aside Money in a Trust Fund

Unlike a will that can be challenged by third parties, a trust fund will help make sure that your money reaches your child.

You can set the trust up to be dispersed in one lump sum or according to a payment schedule, and you can even determine what the specific purpose of the money distribution would be.

Do bear in mind that a trust fund will gain interest only if it holds assets that produce income.

8. Purchase a CD for Them

You can open a certificate of deposit on behalf of your child using a custodial account.

CDs are low-risk investments which means that they can be used to teach the kid about the importance of investing and saving.

The earnings from a CD will be taxed as income, and it might not be the best way to save money for your child’s college education, but it’s a great educational tool.

9. Open a Brokerage Account in their Name

A custodial account would allow a minor to own assets in a brokerage account as well. However, the custodian will make all the investment decisions related to the account until the minor claims full control of the account once he or she reaches 18.

Such an account is another great tool that will help introduce your kid to investing at an early age.

See the graphic below, it may be wise to put some money aside to mitigate some of the rising costs of raising children.

How much does it cost to raise a child?

Mobile Apps and Tools to Teach Kids About Money

  • AdVenture Capitalist is a game in which your children will get to dip their toes into the waters of business.
  • With NatWest Rooster Money kids will learn to save for short-term and long-term goals.
  • Con ‘Em If You Can is an online game that teaches teens vital lessons about how to spot a scam.
  • GoHenry is a youth debit card and app that allows parents to decide how their child is going to use the card. Kids can use the application to make to-do lists, budget their allowances, and track spending.

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