Broker Check

5 Ways to Make the Most Out of Your Child's Savings Account

September 30, 2016

It is never too early to start saving for retirement and other major financial occasions for the future. While you may not open a savings account for your toddler just to prepare them for retirement, it does serve a purpose to start a child's savings account at a young age. Here are five ways you can make the most out of this endeavor.

Start Sooner, Rather than Later
Admittedly, you are not opening a savings account for your child as a toddler to help prepare them for retirement. More likely, you are going to open a child's savings account to help them better understand the value of saving and how to manage their money. As soon as your child starts to accumulate any sum of money, open an account for them. This could start as young as an infant when they receive gift money, or money they earn doing chores around the house.

It is never too early to start teaching your children how to handle money appropriately. Bankrate notes that most banks offer low-cost or free savings accounts for minors whose parents will be directly managing the money.

Pay Your Kids First
You can also use your child's savings account to help give them a head start later in life by contributing money to it yourself. You can schedule a portion of your own paycheck to be automatically deposited to those accounts strictly for the purpose of saving for your child. This helps you establish a routine of saving money for your child before you can spend it elsewhere.

However, this will only work if you remember to restrict yourself from making withdrawals on that money, but you might find it easier to do so if you assign a nickname to the child's account to remind you why you are putting it aside. This money could be used for their education in the future, to help buy their first car when they turn 16, or to generally provide for them as they grow up.

Open a 529 College Savings Account
529 accounts are state-sponsored savings accounts that allow parents to invest after-tax money into an account that grows tax-free and remains tax-free in the future, as long as withdrawals are made to pay for tuition. You will find few limits on how much you can contribute to these accounts, regardless of your income level. USNews has a full list of the tax advantages of a 529 Savings Plan, but generally speaking you will find great flexibility in choosing the plans administered by your state. Some companies even offer shopping rebates that go directly into 529 accounts. Best of all, your relatives can make contributions to the 529 account rather than always purchasing toys and gifts for your kids.

Brokerage Accounts
With a brokerage account, you can invest after-tax income into an account dedicated to your child with maximum flexibility and the potential for high returns over the long term. Accounts can be directly linked to your paychecks for easy deposits. A moderately aggressive approach over a time span greater than 10 years will provide higher dividends, with flexibility in how you spend that money in the future. Pay for college or give your daughter the wedding of her dreams, the choice is yours.

Employer Sponsored College Savings Plans
Last but not least, you could take advantage of an employer-sponsored program if available. Some companies offer direct deposit into a college savings accounts. The primary reason some companies avoid these programs involves the selection process. They do not want to be responsible for choosing the 529 plans to make available to employees. In some cases, companies may even offer small, private scholarships to the children of employees.

In any case, it is important to use a child's savings account to help them build a healthy relationship with money and save now, rather than waiting until later. The sooner you start, the better.

Contact us for advice on starting and maintaining a savings account for your child. Visit Manhattan Ridge Advisors for more information, and to see what services we offer.