Best Ways to Save Money for Your Kids

Best Ways to Save Money for Your Kids

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One of the most exciting events is starting a family of your own. A child brings a large amount of joy to your life. Children are also a big financial adjustment. Daycare costs, diapers, paying for extracurricular activities, food, and clothing are among the expenses that a new child brings into the equation.

That’s all before figuring out the cost of paying for college. Tuition and fees alone cost $10,388 per year at a ranked public college while private colleges cost $38,185. 

Since children can disrupt the budget of a family so significantly, it’s very important to create strategies to save. Teaching your child about money management, helping pay for college, or setting them up financially for success once they become adults are reasons to start them early with savings. 

The traditional way we think of this is by opening up a savings account for a child. However, there are many other choices. Depending on the financial goal that you wish for your child to achieve, the type of account you choose for saving money is different. In addition to a savings account for kids, we’ll talk about the following options:

  • Custodial Accounts
  • 529 College Savings or Prepaid Tuition Plan
  • UGMA/UTMA account
  • Life insurance policy
  • Roth IRA
  • Trust Fund

Let’s begin by talking about saving money and tips to save money first. That will provide the foundation of the other options to save money for kids. 

When Should You Begin Saving for Your Kids?

There is no hard and fast rule about when you should start saving money for your kids. It is better to start as early as possible, however. That gives you more time to save and grow your savings. 

Keep in mind that you should not sacrifice your own financial goals at the expense of paying for your child’s big expenses, such as going to college. People are living longer and can’t rely on Social Security retirement income to support their retirement. 

Your children may end up having to support you in the future! It is in everyone’s best interest that you create a workable budget that allows you to save for retirement and other goals while socking away money for a child’s education. Remember, your child will also be able to work, get scholarships, take out student loans, or consider a community college for the first two years to offset the cost of college. 

It’s perfectly ok if you can only afford to save $50 a month to start your child’s savings because you have other financial obligations like saving for retirement or paying down debt. As your financial situation improves, you can also save more towards your child’s savings. 

Best Ways to Save Money for Your Kids

Ready to start saving money for your kids? There are so many types of savings accounts to choose from. Many are very similar to each other, so it can be hard to determine which one is ideal.  Let’s talk about tips to save money and the best savings account for kids.

Create a Savings Account for Kids

When looking for a saving account for kids, look at high-yield savings accounts or Certificate of Deposits (CDs). These types of savings vehicles offer higher interest rates than traditional savings accounts. 

High-yield savings accounts generally pay 20 to 25 times the national average of a traditional savings account. It’s easy to make transfers into these types of accounts, especially if you have a checking account with a financial institution. Some things to look for in a high yield savings account include:

  • Is there a required initial deposit?
  • Is there a minimum balance requirement?
  • What fees are charged for this account?
  • How can the money be assessed
  • Can you link the account to other banks or brokerages?
  • What compounded method do they use? Look at APY instead of annual interest rate when comparing interest earned on the account because it already includes the compounding factor

A CD could yield you a higher rate of return than other savings products offered by financial institutions. That is because you must leave the funds on deposit for a fixed period of time. This term could be anywhere from 3 months to 5 years in many cases. If you wish to withdraw your funds before it has reached its “maturity date”, you must pay a penalty. 

To start a CD, you typically need to meet a minimum balance requirement. You generally can’t add money into them once you start them. Hence, a CD might be a better option if you have more money than you can start your child’s savings. Or you could open a high yield savings account and transfer money to a CD once you’ve saved enough to meet the balance requirement. 

Set Savings Goals

Saving towards your child’s future is definitely an accomplishment. To keep you on track and have a regular savings, determining a savings goal can help. 

For example, let’s say that you want to save $10,000 in the next 5 years towards your child’s savings. That’s $2,000 a year, which breaks down into $166.67 per month. Now you know how much you’ll need to save each month to reach that goal. 

You can even get your child involved in this. Piggy banks for kids are a fun way to teach them about savings. When the piggy bank is all full, take them with you to the bank to deposit the money and remind them during each trip how their money is growing. 

Automate Your Savings

How does making things easier on you sound? That’s the idea behind automating your savings. Set up automatic transfers to your child’s savings account on a regular interval. After finishing this step, there’s no more effort or thought you need to put into constantly making deposits into their savings. 

Open a Custodial Account

If you want to save money for your child, but don’t want them to be able to access the money until they are adults, a custodial account might be the best option. Parents can deposit and manage the money in the account on their behalf. Since the money is held in the child’s name, they’ll be able to access it when they reach the age of majority. 

Banks and brokerage firms can set up custodial accounts. The Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act both govern custodial accounts. The tax benefits found in other college savings vehicles don’t apply to these accounts. So these accounts are better for parents who aren’t sure if their child will attend college or if they wish to provide a financial gift to their child once they reach adulthood. 

Leverage a 529 College Savings or Prepaid Tuition Plan

There are two types of 529 plans to choose from. The first is a general college savings plan in which parents can set aside money that can be used at any school. This includes private k-12 institutions. 

Some states have a tax deduction for contributions to their state’s 529 plans. All plans are exempt from federal income tax on withdrawals that are used for qualified education expenses. 

Prepaid tuition plans are another type of 529 plan which locks in the current tuition rates for public institutions. Locking in tuition rates at current rates is a tremendous benefit, particularly since costs keep rising. 

Use a UGMA/UTMA Account

A Uniform Gift to Minors Act (UTMA) or Uniform Transfers to Minors Act (UTMA) is a good choice if you want an account that isn’t just for education expenses. 

A UGMA account allows someone under the age of 18 to own securities without the need of a trustee or prepared trust documents. 

UTMA accounts are similar, except they also allow minors to own real estate, fine art, and other types of properties. For this type of account, the minor must have a custodian. Parents who set up a custodial account can make withdrawals for child-related costs. The assets are transferred once the child reaches legal age. 

Neither of these types of accounts can be transferred to another beneficiary other than the child, under whom the account is opened. 

Get a Life Insurance Policy

Purchasing a life insurance policy is often overlooked when looking for ways to protect a child’s financial future. If the policyholder dies, a life insurance policy will pay one or more beneficiaries out of the contract obligation. 

Term and permanent policies are the two main types of coverage you can get. A cash benefit is paid out on a term policy if you die within 10 or 20 years. With a permanent policy, you are covered no matter when you pass, and it can also potentially accumulate a cash value. 

Set Aside Money in a Roth IRA

If a child has earned income from a part-time job, for example, they can have an IRA. Contributions can also be made by a parent on a child’s behalf for up to the annual limit. This is only an option for teenagers since a toddler, infant, etc. can’t legitimately earn income. 

You can also use your own Roth IRA to pay expenses for your child by taking withdrawals. To qualify for a Roth IRA, you must make less than the annual income limit. 

Pros and Cons of Contributing to a Roth IRA

The advantage of using a Roth IRA to pay for college or other expenses is that all the money doesn’t necessarily have to be used for college. When financial aid is calculated, the balance that’s on a Roth IRA 

The drawback is that when you withdraw money from a Roth IRA before reaching the minimum age of 59 and a half, you are subject to income tax and penalties. The exception is if you qualify for an exception. Financial aid eligibility also doesn’t count withdrawals as income. 

Set Aside Money in a Trust Fund

A trust fund is a less common way to save money for children. Opening a trust fund only makes sense if you have a large sum of money to deposit. Therefore, it is typically an option for those who come from wealthy families or those who expect to pass along a sum of money as an inheritance. 

To open a trust fund, an attorney must create trust documents and an individual must be appointed to manage the money. 

Pros and Cons of Contributing to a Trust Fund

A trust fund can be if you wish to set limits on how old a beneficiary needs to be to have access to the funds. You could set it up so they don’t get access until they’re 21, 30, 35, or whatever you wish.  You can also specify how the funds can be used. For example, you could stipulate they can only be used on education. 

Trusts are very complex however which is why you should hire a lawyer to draw up a trust. If you don’t stay on top of all your new assets acquires, the beneficiary may have to go through probate to receive it. There are also many costs that you must pay to set up a trust including legal fees, tax filing fees, and trustee fees.

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