Is your child ready to graduate from the piggy bank?
A piggy bank is often a child’s first introduction to saving money. They are cute, they make a fun “clink” sound when you drop coins into it, and they can be a daily, visual reminder that the money you put in should be saved for something really important. Introducing the concept of saving with a piggy bank is a great first step in any child’s money journey.
At a certain point, often earlier than we think, kids are ready to do more with their money and take the next step. But what is that next step? The landscape of banking products is quite different from the checking and savings accounts I grew up with in the 80s and 90s (and today’s interest rates are a LOT less enticing).
How to know if your child is ready to ditch the pig?
First of all, there isn’t one magical age when your child is all of a sudden ready to open a bank account. Since minors aren’t legally allowed to open accounts in their own name, it really depends on when the parent or guardian is ready to do it with them through joint or custodial accounts. Another factor to consider is how much money they have saved. When gifts and birthday money start to overflow the piggy bank, opening an account with an FDIC insured financial institution is safer and a great next step in developing responsible money habits.
What type of account should you open?
When I was growing up, savings accounts and CDs (certificates of deposit) were all the rage because of the impressive interest rates that ranged from 4%-8%...a far cry from the 0.04% average savings account interest rate we are seeing today. However, earning interest and making money grow is one of the key lessons that kids miss out on when their money sits too long in a piggy bank, so what else is there?
If you’re ready to open an account with your child, here are some options to explore. In future articles, I’ll go through them in more detail, but for now, I’ll introduce some options to consider:
Joint checking and savings accounts: A joint account is a great option for kids who are ready to start managing their own money and spending independently. While these accounts make it easy to connect finances and monitor your child’s spending, they leave much to be desired when it comes to interest and growth potential.
UGMAs and UTMAs: These custodial accounts are a better option for parents who want to move some of their child’s growing savings into a more secure account, but will still need to manage it on their child’s behalf. One of the biggest benefits of these types of accounts is the opportunity to save or invest the funds and achieve a higher rate of compound growth than a traditional savings account.
529s: If you and your child are looking to dedicate some of his or her savings specifically toward higher education, a 529 account offers the greatest tax benefits of any savings vehicle. Since this money grows tax free, it’s a great option if you know you’ll use the funds for college or graduate school.
Brokerage account: While minors can’t legally open their own brokerage accounts, if you are looking for a way to give your kids an early start in the world of investing, you can explore joint brokerage accounts that you manage together. Stockpile is one such app that provides an intuitive and kid-friendly platform along with the capability for friends and family to gift shares of stock to your child.
For more information on these options, stay tuned for my next article where I’ll dive deeper into the pros and cons of each type of account and how to pick what’s right for you and your little saver.