Short answer: Yes. And the sooner, the better!
More than one million children in the U.S. own children’s savings accounts (CSAs), according to a 2021 Prosperity Now study. These accounts offer long-term savings and investment programs for kids and teens, helping them grow their seed deposits and plan for postsecondary education and asset purchases.
However, a kids’ savings account isn’t just about stockpiling cash for the future: It’s about laying the foundation for financial responsibility. By introducing saving from an early age, you empower your children to make informed decisions as adults, reducing dependence on others and fostering a sense of accomplishment when they achieve their financial goals.
Understanding the Benefits of a Child’s Savings Account
The earlier your child starts saving, the more time the money has to grow, thanks to the compounding effect. A child’s account also instills good money habits, like how to save money. By seeing their account balances grow and having a stake in their savings goals, children can learn the value of delayed gratification and responsible money management.
Additionally, a kids’ bank account is a practical tool for teaching financial responsibility. Depositing, withdrawing, and tracking account balances reveal the cause-and-effect relationship between saving and spending.
This financial discipline equips them to pursue their dreams, big or small. Whether they’re saving for college, buying a car, traveling, or even starting a business, savings accounts for kids set the pace for a lifetime of financial success.
Choosing the Best Savings Account for Your Child
The best overall savings account has various key features. Here’s what to look for when comparing kid savings accounts.
- Interest Rate: Shop around for a generous interest rate to maximize your child’s savings growth over time. However, compare standard and introductory rates before opening a savings account. Introductory rates may seem attractive, but they only last for a limited period.
- Fees: Some banks may offer competitive interest rates, but pay attention to any monthly fees that can eat into your child’s savings. For example, some banks charge monthly maintenance fees on a savings or checking account. The financial institution may also impose minimum balance requirements to avoid fees.
- Accessibility: The best savings accounts offer low or no minimum opening deposit to get your child started with saving. Additionally, look for accounts with online and mobile banking features for convenient deposits, withdrawals, and balance inquiries. If your child is older, an ATM card provides financial independence and responsibility by encouraging them to save and spend wisely. However, be wary of potential fees outside the bank’s network.
- Restrictions: Kids’ savings accounts come with various restrictions. For starters, some financial institutions may limit the number of monthly withdrawals to discourage account owners from frequent spending. You may also encounter ATM card withdrawal restrictions and debit card use to preserve savings. That’s not to mention the minimum age limits: Most kids’ savings accounts are designed for minors under a certain age, often 18 years old.
There are various types of savings accounts for your child’s money. They include:
- Joint Accounts: The child’s bank account has an adult co-owner. Both account holders have access to the account.
- Custodial Accounts: A custodian manages the account for a child, making decisions on their behalf until the child reaches a certain age. The account is either:
- UTMA (Uniform Transfers to Minors Act): Allows minors to receive gifts of money, securities, and other assets without the need for a trust. The assets are held in the custodian’s name for the minor’s benefit until they reach the age of majority.
- UGMA (Uniform Gifts to Minors Act): Similar to UTMA but typically limited to cash, securities, and insurance policies.
- Educational Account (529 Plan): This is a long-term savings plan with tax benefits for education expenses.
Remember, the best children’s savings account depends on your specific needs and priorities. For example, online banks deliver high-yield savings thanks to their competitive interest rates. Traditional banks may offer a lower annual percentage yield, but they excel in in-person service. On the other hand, credit unions are known for their community-focused approach and attractive rates and fees.
The Step-by-Step Guide to Opening an Account
Preparation
Opening a savings account presents various legal concerns. For starters, understand your jurisdiction’s laws and regulations. In most cases, minors cannot open their own savings account and need a parent or legal guardian to act as a custodian or joint account holder. Additionally, confirm the tax implications of opening a children’s savings account. Although earnings are generally classified as taxable income, there may be tax benefits depending on the amount of interest you pay taxes on.
You might need the following documents when opening kids’ bank accounts.
- Custodian’s proof of identity, such as a driver’s license
- Child’s birth certificate
- Proof of address
- Social security card
- School photo ID
Choosing the Right Bank
Here’s how to sift through the many savings accounts available and find the right bank for your kids and teens.
- Location: You want a bank with a branch close by if you prefer in-person service for deposits or questions.
- Online Banking: Ensure the bank offers user-friendly online features like mobile check deposit, account monitoring, and easy transfers.
- Financial Education: Consider a bank that provides educational resources to teach your child about personal finance.
- Reputation: Choose a bank with a proven track record for financial stability and customer service.
- Rewards Programs: Some accounts offer bonus incentives for saving, which can be a fun way to motivate your child.
The Opening Process
Here’s the typical process of opening a savings account for a child.
- Research and compare multiple accounts
- Pick an account that suits you and your child’s needs
- Gather relevant documents
- Visit a branch or apply online
- Fill out a form with your personal information and the child’s information
- Make an initial deposit
- Read and sign the account agreement, making sure to confirm account details
- Deposit funds and start saving money
Note that banks have different processes. It’s always best to check their website or call a branch directly for specific requirements and current offerings. Similarly, take the time to explain the account to your child. Teach them about interest, deposits, and withdrawals, and encourage them to set savings goals.
Navigating Challenges and Common Questions
Overcoming Obstacles
Here are some common challenges to look out for when opening the first bank account for your little one.
Minimum Balance Requirements: This is the minimum amount you need in the account to avoid fees. If you cannot afford to deposit a large sum upfront, minimum balances could hinder your child’s saving journey. The solution is finding accounts with low or no minimum balance requirements. Moreover, consider setting up automated recurring deposits from your checking account to your child’s savings account.
Age Restrictions: Some banks have minimum age requirements for opening a savings account. If your child doesn’t meet the threshold, you can explore options such as a custodial account or youth savings accounts offered by a credit union or online banks.
Purpose Restrictions: While some accounts allow broader use of savings, others specify the exact purpose of the money to ensure the funds are used responsibly to benefit the child’s future. However, this poses a challenge if the circumstances change and the money no longer serves the intended purpose. As such, ensure the purpose restrictions align with your savings goals and long-term financial needs.
FAQs
- Can I open a bank account for my child?
Yes, you can open a bank account for your child. Many banks offer savings accounts specifically designed for minors, which can be opened by a parent or legal guardian on behalf of the child.
- How to manage taxes for a child’s savings account
Interest earned on a child’s savings account is generally considered the child’s taxable income. If the total income is below a certain threshold, they may not owe taxes on it. However, if the income exceeds this threshold, it may be subject to taxes. Consult with a tax professional for specific advice regarding your child’s situation.
- At what age should my child get a savings account?
There’s no specific age requirement for opening a savings account for a child. Some parents open accounts for their children as soon as they are born, while others wait until the child is older. It ultimately depends on your financial goals and when you think your child is ready to start learning about saving and managing money.
- Can a child have their own savings account, or does it need to be joint with a parent or guardian?
This depends on the bank’s policy. Some institutions allow minors to have sole ownership of a savings account with limited access features, while others require a parent or guardian to be a joint owner.
- Can a child have multiple savings accounts?
Yes, a child can have multiple accounts to separate savings goals, while learning about financial priorities.
Beyond Savings: Teaching Your Child About Money
Engaging Activities
Here are some fun and interactive ideas to instill financial knowledge from an early age.
- Encourage your child to save their allowance or spare change in a piggy bank
- Discuss real-life money scenarios with your child, such as budgeting for a family vacation or saving for a big purchase
- Let your child help with a shopping list and finding good deals.
- Play money-themed board games like Monopoly or the game of Life
- Instill the value of work by tying allowances to chores
- Get your child a money diary to track their spending and savings
Setting Goals
Here’s a roadmap to help your child set and achieve savings goals:
- Make it their goal: Let your child take the lead in choosing something they’re excited to save for. This could be a toy, a video game, or even saving up for a trip to the zoo. Ownership fuels motivation.
- Set achievable goals: A big, expensive goal can be overwhelming. Help your youngster pick something attainable to build confidence and a sense of accomplishment.
- Break it down: Break down the total amount needed for their goal into smaller, manageable chunks. This makes the goal more achievable and helps your child track their progress.
- Create a plan: Decide how much they need to save each week or month to reach their goal and help them stick to the plan. You can offer to match a portion of their savings.
- Earning money: Give your child an allowance for completing chores or helping around the house.
- Track progress: Use a visual chart or kid-friendly apps to track their savings.
- Lead by example: Children learn best by observing. Set saving goals of your own and involve your children in family discussions about saving and budgeting.
- Adjust goals if needed: If your child is struggling to reach their savings goals, help them adjust their plan. They may need to save more each week or month or choose a more achievable goal.
- Celebrate success: Acknowledge their hard work and celebrate small milestones to reinforce the value of saving and goal-setting.
Resources for Further Learning
- Khan Academy Kids: This resource offers a variety of games and activities to help young children learn about saving, spending, and earning.
- National Endowment for Financial Education: This website provides a variety of resources on financial education, including articles, games, and lesson plans for all ages.
- Greenlight: This app allows parents to give their children a debit card that they can use to make purchases and track their spending.
- Lemonade in Winter: How a Group of Kids Made Millions Selling Mix (ages 6–9): This book tells the story of a group that started a lemonade stand. Your child will learn financial concepts such as profit, loss, and marketing.
- The Berenstain Bears’ Trouble with Money (ages 4–8): This book tells the story of the Berenstain Bears who learn about the importance of saving money and the difference between needs and wants.
Conclusion
Opening a savings account for your child is a proactive step toward securing their financial future. By using this tool alongside open conversations about money, goal setting, and responsible spending, you’re equipping your child with the knowledge and confidence to make sound financial decisions for years to come.