Setting Your Child Up for Financial Success
I’ll admit, I got a little emotional when my husband and I finished opening a savings account for Baby M. It felt like such an important, initial step towards securing his future. Here, I walk you through the steps you need to open a savings account for your child.
My relationship with money has not always been a healthy one. I know the issues stem from irresponsible spending habits in my youth. It’s something I still work on daily. As I come to my own understanding of wellness, I have greater respect for the financial dimension and its role in the grand picture of life. Financial freedom is a goal for so many of us. To be able to set up my baby in the direction of that goal was so meaningful to me. More importantly, giving him the tools to one day understand finances is something that can empower him to make life-changing decisions down the road.
Why You Should Open a Savings Account for Your Child?
Creating a financial foundation for your child is so important. Making the decision to open a savings account for your child who can’t open one for themselves is a commitment to teaching them about the importance of finances.
It is never too early to open a savings account for your child. In fact, the sooner you do, the more they will save! Just think, if you deposit $5 a week, or one Starbucks almond milk latte;-), over 18 years, this account will accrue thousands of dollars. The sum just keeps growing when you top it off with money received from allowances, birthday and holiday presents, etc.
Once your child becomes old enough to have a meaningful conversation about money, this account will be the catalyst.
What You Need to Open a Savings Account for Your Child
Here are some tips to breakdown what you need to open a savings account for your child:
Tip 1: Decide which type of account you wish to open
- Custodial Savings Accounts: Adult controlled on behalf of a minor until the child reaches 18 years of age at which point the account controls transfers to the named child.
- Pros: Flexibility with no income or contribution limitations. No withdrawal penalties. No limitations on what money can be used for.
- Cons: Holdings in the account will count as assets and could reduce financial aid and other government assistance eligibility. Consider a 529 account if you are solely looking to save for education.
- 529 Plan: Tax advantage accounts to cover educational costs from kindergarten to graduate school. Each state has different criteria and rules.
- Pros: Earnings from 529 Plans are exempt from Federal and State income taxes when money is used for educational purposes. Many states provide tax deductions/credits for amounts contributed to 529 Plans.
- Cons: Any withdrawals other than educational purposes are subject to taxes and a 10% penalty fee.
Tip 2: Have your and your child’s Social Security Card.
- Don’t have a Social Security card yet for your child? The hospital took care of the paperwork for Baby M’s social security application shortly after he was born. Low and behold 2 weeks later the card arrived (I was pleasantly surprised by our government’s quick turnaround). In addition to opening a bank account, you need a Social Security number for your child for a number of reasons, such as claiming your child as an independent on tax returns or setting up health insurance. Here is information on how to get your child’s Social Security number
Tip 3: Money for the initial deposit
- Some banks have no minimum opening requirements for custodial accounts. The bank we chose had a $25 minimum requirement. The initial deposit is the least of concern. Know that no amount is too small. What is most important is your commitment and if you are reading this post then I think you are already on the way to winning!
Tip 4: Set up a plan for deposits and how much
- This is your child’s bank account. You are committing to the important decision to keep their money separate from yours. It is important to set up a deposit plan for it. For example, my husband and I decided to automatically deposit a certain amount each month from our account, which is at the same bank, into Baby M’s account. In addition, any money that he receives from grandparents, for holidays, birthdays, etc. will go into this account. As he gets older and starts earning an allowance, we will work with him on establishing a savings plan.
The Last Thing You Should Do When Opening a Savings Account for Your Child
- So, you made the ever-so-important decision to invest in your child’s financial future. Now it’s time to celebrate! Take this as a win. No matter how big or small the initial deposit is, it will only grow over time and with commitment.
What your savings plans are for your child? What works for you and your family? Drop a line in the comments below, I’d love to know!