Itís never too early to start saving money, which is why a growing number of parents are opening savings accounts for their children. Doing so can help establish a brighter financial future for your child. Dave Sieminski of the Consumer Financial Protection Bureau notes a study that found children from low-income families were three times more likely to go to college and four times more likely to graduate if they had an established savings account. Many parents may be unsure about how to go about establishing such an account. Fortunately, the steps needed to establish a savings account for your child are easy to follow.
Step #1: Determine if your child is the right age for a savings account
Rachel Hartman of Bankrate advises that before parents seek out a savings account for their child, they must first determine when to establish an account. Most experts agree that by the age of eight, children should be old enough and have enough knowledge to understand the benefits and process of saving money. Before turning eight, children can utilize a money jar or piggy bank to store accumulated money. Hartman says that this will lay the groundwork of helping children understand the benefits of saving money. Many parents are actively establishing savings accounts prior to this age. Madison Dupaix of The Balance explains that many parents set up a savings account right after their child is born to maximize savings.
Step #2: Determine the right kind of account to open
There is more than just one type of savings account you can open for your child. Some of them function in the same way that an adultís savings account does, while others are designed with young children specifically in mind.
One of the most popular savings accounts for children is a 529 college savings account. Kimberly Palmer of U.S. News explains that 529 accounts are state-sponsored savings accounts that allow money saved for tuition to grow tax-free. Franziska Castillo of Lifehacker notes that each state operates 529 accounts according to different rules. Itís important to research the rules in your state prior to setting up a 529 account. Another option available to parents is to open up a savings account for their child at their own bank, if itís one they trust and one that offers good benefits.
Step #3: Plan a trip to the bank
Hartman says one of the best ways to showcase the importance of a savings account to your child is to take them with you to the bank when you set up the account. This will help your son or daughter see how a bank operates. It will also help children visualize where their money is being stored, which is important for children who are visual learners.
Step #4: Go over financial basics with your child
The financial lessons for your child donít end with a trip to the bank. Tierney explains that parents should continue to teach children lifelong financial lessons in regard to their savings account. Hartman says that one of the most important of these lessons is to explain to them what interest is. Describing the concept of interest can help children realize the benefits supplied by a savings account. Spencer Tierney of NerdWallet suggests going with a bank that offers a healthy interest rate so children can see that accumulation in action.
Step #5: Set savings goals and reward good behavior
Hartman also emphasizes the importance of setting goals for your child in terms of their savings account. Children respond to an exercise better when there is a specific goal set in place. That goal could vary from reaching a certain monetary amount in the account to submitting a certain percentage of their chore money into their savings account every month. When these goals are reached, consider introducing a non-monetary reward, such as a fun family outing or a favorite meal, which will encourage good financial behavior in the future.
Laying the groundwork of sound financial decisions for your child will help them continue this behavior well into adulthood.