Kids Savings Account- Do they need one?

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No, children do not need a savings account but most parents feel like they should open one up as soon as their child gets their first birthday or holiday check. Most of the time, these account balances hover around the same amount of money for years and the bank pays very little interest (like 0.01%). Is it worth it? Does it even make sense to have savings account for your children?

If you have accounts already established or are thinking about opening one for your child, follow the steps below to determine what is right for your child.

 Step 1: Get your own financial life in order. It’s time to practice what you preach. Do you have a good handle on your own family’s finances so that you can calmly and positively discuss money with your kids? If yes, read on. If no, get yourself organized first. Have a budget, consolidate old accounts, and have a plan for saving for your goals.

Step 2: Decide on the intent for saving for your children. Is the goal to teach your children about saving and the value of money? Or do you want to start setting aside money for college? You can do both, but they involve different types of accounts.

If you want to teach your children about saving and the value of money, this entails actively involving your children. While the concepts of compounding interest may be over their heads, it is a powerful lesson to help them open an account and deposit money. Focus on savings and not spending the money.

For college savings, a savings account does not cut it. You need an account with growth potential and the best way to achieve growth is tax free through a 529 Plan. There are over 80 plans on the market. You can pick a plan in any state and use it for any qualified education expenses (room, board and tuition) nationwide and with a lot of international programs. is an excellent resource. To take the most advantage of growth and the power of compounding, start saving early and invest in the Static Aggressive Growth Portfolio if offered in the plan you choose.

Step 3: Pick an interest bearing savings account. Online banks and credit unions offer the best interest rates for savings account, even for minors. There are several amazing deals out there I wanted to share. Here are two of them:

The Barclays Dream Account has a 1.05% APY and when you make deposits for six straight months you get a 2.5% bonus on the past six months of interest earned, and you can earn an additional 2.5% bonus by not making any withdrawals for six months in a row.  This account is available via online banking only and is FDIC insured.

Parents can deposit up to $1,000 in the account each month, and transfers from non-Barclays bank accounts are free. Kids can have their own username and password, but only adults can make withdrawals.

Chevron Federal Credit Union pays 7.0% APY (!) on the MySavings account for members 21 years old or younger on account balances up to $1,000, with balances above $1,000 earning the regular Savings rate of 0.25%.

Step 4: Allowance. At what age should you start paying an allowance? How do you decide on the amount? Should allowance be in cash or go directly into a savings account?

Age appropriateness is important, but maturity is the key. Is your child interested in having independence and being able to buy items on their own? If yes, they are ready to be responsible for their own money. If they could care less, wait until they start caring.

I do not believe in tying allowance to being a good citizen of the house. By making allowance dependent on doing household chores, chores can become negotiation points with your kids and put parents on the defense.

Children under 5 do not need allowance. Stick to the piggy bank and pay young ones for doing special jobs around the house.

My daughter opened a savings account in 3rd grade. She deposits any monetary gifts less than $50 into her savings account. Any gifts of greater value go into her 529 plan. Each week I automatically transfer $5 per week to her account for allowance. I never have cash on hand and my daughter tends to misplace things in her room, so we decided a direct transfer was best. My daughter looks at her quarterly statement and likes to see her balance increase. As a result, she rarely takes out any money unless it is for something she really wants.

Don’t make the mistake of sitting on $1,000 earning no interest in a savings account under your child’s name. Set intent for the money, involve your children, or if they are too young to be involved… close those accounts and dump the money in a 529 plan. In ten years when the money has doubled, you will be happy you did something with it!

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