Why and how to open a savings account for your kid.
There are many reasons to open a savings account for your kid, but maybe the most important reason is it improves their financial literacy, increases their chances for going to college and will put them on the patch of investing and living within their means as they turn into adults. The data shows that children with savings accounts are 4 times more likely to own stocks as adults and they are 7 times more likely to go to college and more likely to graduate as well. They are more likely to budget as well as differentiate between needs and wants. This is a powerful reason why you should open a savings account for your children.
The amount you fund the account with does not really matter that much. What is more important is to communicate it to the child and involve them in the process or starting it. Or get the kid involved in the process right after you open a savings account for them. As if the kid does not know about the account or participate in all the financial decisions, then this defeats the purpose. It also also possible to build emergency savings even when on a low income.
Why open an savings account for your kid?
There are many reasons why. As we have noted multiple times, it is sad and shocking how little Americans know about money. Study after study shows that the levels of financial literacy in this country are terrible. But we can sort of understand why it is so bad. As so few schools teach financial literacy or basic budgeting.
In addition, like many things in life, the lack of financial literacy almost always passes down from generation to generation. In other words, the kids parent(s) were never taught it in school (or from their parents), so their kids do not learn it. Then that lack of knowledge continues to go from generation to generation…just like the cycle of poverty often does.
Anyhow, opening a savings account for your children, and involving them in the process or the aftermath, should help educate them about the importance of saving, money, budgeting, and more. It can help “break” the cycle.
When a kid has a savings account, it can change the way they think about the future. They have an increased chance of thinking about saving money, building wealth, and focusing on needs vs wants. Studies show it will have a positive impact on the child’s expectations of the future and accumulating funds. It will also help improve the parent’s future expectations as they will also focus on building and saving money over time. The studies show the impact is even more pronounced for low to middle income families. There are also apps to teach kids financial literacy.
Children with savings accounts are seven times more likely to go to college. There are studies, including from the Center for Social Development at Washington University, that show a kid will understand the importance of education and earning a decent income, so they are more likely to want to get the best education they can afford.
While college is expensive, every dollar helps. Even more importantly it improves the kids mindset when it comes to higher education. The account and the money they have saved will increase the kids expectations for a higher education. In addition, the benefits are even more pronounced for low income families with kids, as they will see college as achievable goal as they will have a little money to their name.
The account of course will not come close to paying for the cost of college, but the knowledge, discipline, and “power” created from opening an account and saving money changes the mindset for the student. This also goes without saying that if the student has a savings account they will have more money available to them to pay for college or a higher education.
Not only are they 7 times more likely to go to school, but students with a savings account are 4 times more likely to graduate from college. The reasons include having more funds available as well as general increased knowledge over education, savings, and accumulating wealth.
A savings account also leads to a greater chance of investing in stocks as the kid ages. Studies show that children that have an account open in their name are 4 times more likely to invest in stocks as well as save for retirement as they get older. This will of course help increase their chances for long term financial success, retirement, and it will lead to more financial security over the long term. There are even ways for kids to start to build a passive income.
In addition, as adults in their 20s, the average amount of money they have saved will be about $2,000 as compared to kids that did not have a savings account in their name. This shows it builds a lifestyle of saving and paying themselves first. It shows it creates a mindset. Find free apps for investing, which can help both the parents and children.
How to open a savings account for a child
First of all, shop around. Ideally you should never pay a fee. Most banks, credit unions, or online banks offer savings accounts with no fees. Always look for one that does not require a minimum balance as well.
There are a couple different types of accounts. One is a Custodial Account. The other is an account that is strictly for Minors. The key difference is the custodial accounts do not allow a kid under the age of 18 to access the funds; only the parent can. The minor account allows the child to in effect control everything.
There are really so many options out there. National banks, local credit unions, online services/lenders and more. It can be challenging to navigate. Always shop around before opening a saving account for a kid. Review fees, minimum balances, term and conditions, and the fine print of any contract. Look online and with any bank you currently have an account with, as they may also deals for any additional accounts.
But there are resources that can help a parent navigate the process. One will be non-profit credit counseling agencies, as they offer all sorts of budging advice, information on investing, paying down debts, retiring and more. Many of their services are free for low income families.
There are countless benefits to opening a savings account for your kid. It creates a mindset of saving, budgeting, investing, and leads to increased chances of college and/or a higher education. It is never too late to start!