As a parent, you want nothing more than the best for your children, and there’s nothing better than teaching them how to be financially responsible from a young age. Opening a savings account for your child when they’re born is the first step towards investing in their future. Since this task can seem daunting at first, we’ve offered answers to a few questions you may have about jumpstarting your child’s savings.
Why should I open a savings account for my kid(s)?
You should open a savings account for your kid for the same reason you opened one for yourself: to stash some cash somewhere safe and let it grow with interest over time. Even though your child probably won’t have income until they’re a teenager, a kids savings account is a great place to put any birthday money and/or allowance that would otherwise be quickly spent.
Establishing your child’s savings account teaches them about the importance of saving, budgeting, and spending responsibly, because the account enforces ownership over their finances from a young age. As they begin to feel more responsible for the account, they may begin to prioritize saving over spending.
While opening a savings account has many benefits, you should wait to open a checking account so your child can’t transfer funds and inadvertently drain or overdraft the account.
When should I open a savings account for my kid(s)?
You should open a kids savings account as soon as possible! Typically, there is no age requirement for opening an account. In fact, anyone under 18 has to have at least one joint owner on the account, so you’ll actually have to co-manage the account with your child.
By starting to save as soon as possible, you’ll start to earn interest as soon as possible, so it’ll amount to more by the time your child is ready to withdraw any money. And with rising college tuition costs, you should also begin thinking about saving money for your child’s college or trade school as soon as possible.
How much and how often should I contribute to the account?
If you’re setting up a savings account for general financial security or to foster responsible spending, it’s best to only put birthday money and/or allowance from chores so that your child gets used to spending their own personal earnings. If you also want to contribute to the account but you don’t want your child to spend that money, consider opening a Holiday Savings Account with PFCU. With this account, you can create multiple buckets that you can label according to what you’re saving for.
If you’re saving money for college, start the process by looking into a PA 529 Plan, as college costs are expected to double over the next 10 years. The Pennsylvania 529 College and Career Savings Program is a smart, tax-advantaged way for families to save for education, and this may be a very valuable resource as your child inches towards college.
You can start now by saving up enough to cover at least one third of expected college expenses. And while you shouldn’t rely solely on it, you may be able to lean on potential scholarships and financial aid for the remainder. Also, once your child reaches the legal working age, they can get a part-time job and contribute to the savings account as well.
If you’re starting to save right after your child is born, you should try to save roughly $200/month (this is calculated for a public in-state college, which is estimated to cost $60,000 in 10 years). If you can’t save $200/month, don’t be discouraged, any amount counts! Some research, including a 2013 study at Washington University in St. Louis, found that kids with college savings accounts with less than $500 in them are three times more likely to attend college than those with no savings account.
Most importantly, you should save whatever amount you’re comfortable with! For many families, this is about 10 percent of discretionary income, and if you take it day by day, you might be surprised by how much you’ve saved in the long run.
What should I look for in a kids savings account?
Since you’re using this account to enforce a positive attitude towards saving, the most important things you should look for in a kids savings account are no/low minimum balance requirements and no/low monthly fees. It’s important that your child sees the account as something that helps their money grow, not something that depletes their account by charging fees that your child may not understand.
You should also look for an account with a high interest rate, so the money in the account can grow to its highest potential; the best rates are often found at your local credit union.
Finally, while online banking institutions that offer mobile apps can be convenient, you should select an account with an institution that offers in-person access. Walking into a branch office is a great way to familiarize your child with routine transactions and talking about financial matters. It also helps them view the branch office as a place they can go if they need help with anything or want any financial advice.
At PFCU, we want to see you and your child thrive! Visit our site to determine which youth account is right for you.
Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM