How early is too early to start saving?
Warren Buffett’s multi-billion empire arguably started at age 6, when he bought packs of gum at his grandfather’s grocery store and spent his evenings selling them door-to-door in his neighborhood. The successful gum enterprise soon led to selling six-packs of Coca-Cola, which led to delivering the Washington Post and later to magazine subscriptions. Throughout his childhood, Buffett challenged himself to earn more and save more. By the time he was 11, he had saved $114 (or about $2,000 in 2018 dollars) and invested in his first stock. The rest, as they say, is history.
Buffett’s path might not be for everyone, but there are plenty of reasons to teach a child to save money other than to amass a billionaire’s fortune. And thankfully, today there are plenty of ways that both parents and kids can get into the habit of saving and increase their financial know-how.
WHAT are your options?
Broadly speaking, there are two types of savings accounts for children: those held strictly by the parents or guardians until the child becomes an adult, and those held jointly between the child and the adult.
In the first category, the most common types of accounts are custodial accounts, which can be called UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minor Act) accounts, depending on the situation and state of residence. The funds in these accounts are exclusively managed by the parent/guardian, who can make withdrawals and deposits.
With these accounts, although the money is technically property of the minors, they don't have access to the funds until they turn 18.
A trust fund can also be used as way of setting up a savings account for a minor child. Although traditionally associated with wealthy families due to the costly transaction fees involved, trust funds are now within reach of people with much more modest incomes. Under a trust, the money is set up in an account that neither the child nor the parent can withdraw from until the minor reaches the age established in the trust documents. There are quite a few benefits associated with trust funds, chief among them being the virtually iron-clad protection of its assets and significant tax savings.
The quickest way to double your money is to fold it over and put it back in your pocket.
There are also accounts meant specifically for parents wishing to save for the child’s college education. Among them, the most often used is the 529 plan, a savings account that qualifies for significant tax benefits and is designed to hold money specifically earmarked for higher education. Also known as the “qualified tuition plans," these are sponsored by states, state agencies, and/or education institutions. Deposits to a 529 account are not deductible from federal taxes, but are deductible from some state taxes. However, the money is allowed to grow tax-free and the interest that accrues on it is not taxed when withdrawn from the account.
While the above are great ways to save for a child’s future, savings accounts specifically made for children that are held jointly with their parents present a different set of benefits and opportunities.
A minor savings account, or child savings account (CSA), is an account jointly owned by both parent (or guardian) and child. Because they’re meant for children, there is usually little to no minimum deposit required and customers are not penalized for low monthly balances. These accounts also generate interest, which can be encouraging to kids who can watch their balance grow just by leaving their money in the account.
Some banks and credit unions also offer rewards or prizes for depositing, and even if they don’t, parents can always choose to incentivize their kids by matching funds or adding a little more if they deposit a certain amount.
how your child wins!
Research has consistently shown the dramatic effect a savings account can have on a child. Dr. William Elliott, III, professor at the University of Michigan and one of the leading experts in the field of children’s savings and college debt, found that having any savings account – no matter how small – can change how a child sees their future opportunities, make them more likely to attend college, and create a savings mentality that can lead to wise financial choices as an adult.
His research also showed that children with early access to savings accounts – regardless of their family’s income – accumulated more assets later in life than children who did not have them. They were also four times more likely to invest their money as an adult.
In fact, the savings account effect is so marked, that at least 16 cities and states have put programs in place to help low-income parents start child savings accounts, with the aim of increasing all children’s chances of going to college.
San Francisco is one such example. Through a program called Kindergarten through College, the city opens a savings account for every child entering its public school system at kindergarten. They then make an initial deposit of $50 and provide incentives to keep children and their families depositing into the account. Additionally, San Francisco is committed to providing “culturally and developmentally” appropriate education to families, even providing free sessions with financial coaches.
But the benefits of child savings accounts go beyond making college more attainable. Getting children involved in managing their money can help teach them important life skills, goal setting and discipline. It also increases children's sense of self-efficacy, that is, their belief in themselves and their ability to produce desired outcomes.
Teaching children to count is fine, but teaching them what counts is best.
With children, goal setting starts with short-term objectives. Helping children come up with a plan to buy something they want can improve their self-discipline and is a great opportunity for both parents and kids to improve their financial literacy. Many banks and credit unions will encourage kids that are saving for a particular goal by giving out prizes if they make more than a certain number of deposits. Many also provide age-appropriate banking information and online tools the whole family can use.
There is another big benefit to an early start on saving: financial self-efficacy. The concept of self-efficacy is rooted in behavioral psychology and refers to an individual’s belief in themselves as someone who can accomplish their goals. A strong sense of self-efficacy has been correlated with perseverance, optimism about the future, and an increased ability to bounce back after life’s challenges.
Individuals with a sense of financial self-efficacy specifically have been found to have greater savings and assets throughout their life, while lower financial self-efficacy – that is, doubt about one’s ability to manage financial challenges – is strongly associated with future debt.
what's best for your child?
Choosing the right savings account for your child is much like choosing the best bank account for yourself.
It’s important to note minimum balance requirements, how often you can or should access your accounts, any monthly fees and, of course, interest rates.
Look for accounts with a 1% or more interest rate. Many of the savings accounts meant for kids do not require a minimum balance and can be opened with a very small deposit, but make sure to read the fine print as some banks will charge fees if the account is not accessed frequently enough.
It’s also important to note that federal law restricts the number of free withdrawals that can be made from a savings account, limiting them to six per month. After that, banks are allowed to charge a fee for transfers or withdrawals and even change the account to a checking account if the transaction limit is surpassed too frequently.
In addition to these basics, when it comes to helping your children save, it’s important to choose a bank that makes the process as kid-friendly as possible. This is often done by way of online goal-setting tools, calculators that can help kids see how their savings will grow with compound interest, and clear explanations about financial matters.
The fact is, however, that it’s not easy to save. For families who are already struggling to make ends meet, it might seem like a sacrifice to set money aside. However, research and the experience of thousands of families consistently shows that even a minimal investment in a savings account can have far-reaching benefits.
If money is being saved for college, it can create a “college-bound identity” in a child, which greatly increases the odds that she or he will, in fact, pursue higher education.
If the money is intended for short-term goals, savings can serve to increase self-discipline, responsibility, and give the child practice with setting goals and achieving them.
And if it’s only a minimal amount here and there, it can still teach children to manage their money and to understand the ins and outs of personal finance.
The big takeaway is that it’s not so much about the amount that is saved. The truly important thing is the mere act of saving. Setting money aside and learning how to manage it can teach children – and potentially their whole families - healthy financial habits that will last them a lifetime.