Are you looking for ways to help your kids save money? Teaching your children the importance of financial responsibility is an important life lesson.
To help you get started, we’ve rounded up the best ways to save money for kids. Read on to learn more!
Make a Financial Plan for Your Kid
Creating a financial plan for your kid is the first step in saving money for them.
It’s important to have a plan in place so you know what goals you want to achieve, how much money you want to save, and what it will be used for.
When making a plan, consider what you want to save up for, such as college tuition, books, or room and board.
Additionally, consider setting up a will or inheritance fund in case something happens to you while your child is still growing up.
Once you have a plan in place, you can start enacting it with a savings account.
Budget Money To Put Away In Your Kid’s Savings Account
Budgeting money to put away in your kid’s savings account is a great way to save up for their future.
This money can be used for a variety of things, such as college tuition, books, or room and board.
Parents can budget money in many ways, such as collecting all the money their kid earns through doing chores, mowing lawns, or babysitting, or deciding on a certain amount that they automatically transfer to their savings account each month.
Setting up a savings account for your child is a great way to ensure that they have the financial resources they need when they reach adulthood and leave home for the first time.
How much should you save for your child’s future?
It is important to start saving for your child’s future as early as possible so that you can take advantage of the power of compounding interest.
Investing just $1 per day from birth can lead to more than $13,000 by the time your child turns 18. If you wait until your child is 5 years old to make the same investment, that total falls by almost half.
Therefore, investing in a tax-advantaged 529 plan or custodial brokerage account is likely to yield more return on your money than a high-yield savings account.
By investing and teaching your child the importance of saving, you can set them up for a successful financial future.
The best way to save for a child’s future is to start now
Raising a child is expensive, and planning for college is a huge part of that. Start saving now to ensure you have enough to cover future education costs. Here are five ways to get started:
1. 529 College Savings Plans: These are tax-advantaged investment accounts that can help you save for your child’s college tuition.
2. Roth IRA: An individual retirement account with specific tax benefits when used for education expenses. You can open an IRA in your child’s name.
3. UGMA and UTMA Accounts: These accounts establish ways for minors to own stocks, bonds, real estate, and other assets.
4. Brokerage Account: Allows you to invest money in stocks, bonds, and mutual funds.
5. Savings Account: A traditional bank savings account is a safe place to store money, whether yours or your kid’s. Look for a high-yield savings account to earn higher interest rates.
It’s never too late to start saving for your child’s future, but the earlier you start the better.
Consider investing in one or more of these five options today to ensure your child has the funds they need for college and beyond.
Create a Children’s Savings Account
Creating a children’s savings account is a great way to get your kids started on the path to financial success.
These accounts can help children develop the habit of saving, rather than spending, their money.
Most banks and credit unions offer children’s savings accounts, which parents can co-own.
It’s a simple way to save for kids, and parents may want to set up a recurring allowance transfer to their child’s savings account.
This can encourage children to take an active role in managing their money while also earning some interest.
As children age, parents can move them into teen checking accounts and issue debit cards, with parents remaining co-owners to monitor and assist their kids with money management.
Leverage a 529 College Savings or Prepaid Tuition Plan
Financial experts agree that a 529 plan is the best way to save money for child college costs.
These accounts come with tax benefits and many plans feature low fees.
There are two types of 529 plans: a general college savings plan that allows parents to put money aside for any qualifying college or private K-12 institution, and a prepaid tuition plan that allows deposits to be used for a child’s tuition at any public college or university.
Some states provide a tax deduction for contributions to their state’s 529 plan, and withdrawals used for qualified education expenses are exempt from federal income tax.
It’s important to understand any limitations on the use of money in the account, as withdrawing money for non-qualified purchases could result in a tax penalty.
Use a Roth IRA
A Roth IRA can be a smart choice for parents looking for the best savings plan for child expenses that offers flexibility.
A Roth IRA allows people to save after-tax dollars for retirement.
In 2022, workers younger than age 50 can save up to $6,000, while those age 50 and older can contribute $7,000. Money withdrawn after age 59½ is tax-free, but withdrawing any gains before that age results in a 10% tax penalty.
High-earning households can use a backdoor Roth IRA strategy to access these accounts.
Teens can also open their own Roth IRA once they have a job and begin earning money.
Some parents match their children’s IRA contributions to provide an additional incentive for them to save.
Open a Health Savings Account
If you are covered by a high-deductible health insurance plan, a health savings account is an option to consider.
These accounts allow up to $7,300 in contributions in 2022 and money in the account grows tax-free and can be withdrawn tax-free for qualified medical expenses for yourself and your child.
At age 65, money can be withdrawn for any reason and only be subject to regular income tax, the same as a traditional 401(k) or IRA.
Look Into an ABLE Account
Parents who have a child with a disability may want to look into an ABLE account.
These accounts are relatively new, created by 2014 legislation, and allow up to $16,000 in contributions in 2022.
Money in the account grows tax-free and can be withdrawn tax-free for qualified expenses.
Moreover, these accounts do not count against government assistance such as food assistance, Medicaid, or other service programs.
The great thing about the ABLE accounts is that they allow parents to save for their children without jeopardizing their eligibility for these programs.
Open a Custodial Account
A custodial account may be a good option for parents who want to save money for their children without allowing them access to cash until they are adults.
These accounts are governed by the Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act and can be set up at banks or brokerage firms.
Money is held in the child’s name, but parents can deposit money and manage the account until the child reaches the age of majority.
With a custodial account, parents may also have the option of investing in securities that may otherwise be off-limits for children.
However, parents should be aware that upon reaching the age of majority, money from a custodial account is automatically transferred to their child, and there is no guarantee that it will be used for the intended purpose.
Set Aside Money in a Trust Fund
Parents who want to save money for their children but don’t want them to have access to cash until they are adults may want to consider a trust fund.
Trust funds can be set up with any amount of money, and limits can be placed on how the money is used and when it is accessed.
An attorney needs to draw up the trust documents, and someone must be appointed to manage the money.
It usually doesn’t make sense to set up a trust fund unless you have a large amount of cash to deposit into it, and creating one may cost several thousand dollars.
Use Tools That Teach the Value of Saving Money
1. Start early: Teaching your child about saving money should begin as soon as they can understand the concept.
2. Get them involved: Get your child involved in conversations about money and budgeting.
3. Give them autonomy: Allow your child to have some autonomy by giving them their own savings account and encouraging them to save for the things they want.
4. Use tools that teach: Consider using tools such as Stockpile, which allows kids to invest in fractional shares and see their savings grow over time.
5. Let them make mistakes: Don’t be afraid to let your child make mistakes when it comes to saving money; it’s an important part of learning how to become financially responsible.
6. Provide incentives: Offer incentives such as matching contributions or rewards for reaching financial goals.
7. Lead by example: Show your child by example how to save money wisely.
8. Talk about the future: Have conversations with your child about the future and how saving money now will benefit them later in life.
Money Mistakes Parents Make
1. Not Teaching Kids Smart Money-Management Strategies: Teaching your children how to save, budget and invest can help set them up for financial success for the rest of their lives.
2. Not Starting to Save Early: Starting to save for your children early on can help ensure that they have the money necessary for college or other expenses.
3. Not Leveraging a 529 College Savings or Prepaid Tuition Plan: 529 plans are a great way to save money for child college costs as they come with tax benefits and low fees.
4. Not Opening a Children’s Savings Account: Opening a separate savings account is the most basic way to save for kids, and setting up recurring allowance transfers can help them develop the habit of saving.
5. Not Using a Roth IRA: Roth IRAs can be a smart choice if you’re looking for the best savings plan for child expenses that offers flexibility, as the money withdrawn after age 59½ is tax-free.
6. Not Opening a Health Savings Account: Those with a qualified high-deductible family health insurance plan can contribute up to $7,300 in 2022 to a health savings account, which is tax-deductible and grows tax-free.
7. Not Looking into an ABLE Account: ABLE accounts allow parents to save for their children without jeopardizing their eligibility for food assistance, Medicaid, or other service programs.
8. Not Opening a Custodial Account: Custodial accounts allow children to own securities or other assets that may otherwise be off-limits for them and are governed by the Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act.
9. Not Using Tools That Teach the Value of Saving Money: Giving children a say in stock purchases and using apps like Stockpile can help teach them more advanced concepts such as investing and show them how the value of the money they save and invest changes over time.
Plan When To Hand The Savings Account Over To Your Kid
When deciding when to hand the savings account over to your child, there are several factors to consider.
You may want to wait until they reach a certain age, such as 18, before transferring the account into their name.
Alternatively, you may decide to transfer the account to them when they become old enough to get a job for teens and add a checking account alongside their savings account.
It is also important to consider any stipulations you want to put in place for what the funds should be used for.
Transferring the account to your child can also be a great learning opportunity, teaching them about financial responsibility and budgeting.
FAQ’s
Conclusion
Teaching your kids about the importance of money and how to save it is a valuable lesson. Hopefully, this article has given you some ideas for creative ways that you can help your children build their savings. If you have any additional tips or strategies for saving money, please share them in the comments below.
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