Determining the right time to establish your child’s financial basics.
It’s never too early to start saving money, which is why more parents are opening savings accounts for their children. Doing so can help build a brighter financial future for your child. A study cited by Dave Sieminski of the Consumer Financial Protection Bureau found that children from low-income families were three times more likely to go to college and four times more likely to graduate if they had an established savings account. But many parents are unsure of how to go about setting up an account. Fortunately, the steps are simple and easy to follow.
Step #1: Determine If Your Child Is the Right Age for a Savings Account
Before parents seek out a savings account for their child, they must first decide when to set one up. Rachel Hartman of Bankrate advises that by the age of eight, children are typically old enough to understand the benefits and process of saving money. Before turning eight, children can use a money jar or piggy bank to store their accumulated funds. Hartman suggests this helps lay the foundation for teaching the importance of saving. However, many parents are opening savings accounts before their child turns eight. Madison Dupaix of The Balance explains that some parents start a savings account right after their child is born to maximize savings.
Step #2: Determine the Right Kind of Account to Open
There are several types of savings accounts to choose from for your child. Some function the same way as an adult’s savings account, while others are specifically designed for young children. One of the most popular options is a 529 college savings account. Kimberly Palmer of U.S. News explains that 529 accounts are state-sponsored and allow tuition savings to grow tax-free. Franziska Castillo of Lifehacker notes that each state has its own rules for 529 accounts, so it’s important to research the specific regulations in your state before opening one. Another option is to open a savings account for your child at your bank, if it offers good benefits and you trust it.
Step #3: Plan a Trip to the Bank
One of the best ways to show your child the importance of a savings account is to take them with you when you open it. According to Hartman, this experience helps children see how a bank works and visualize where their money is being stored, which is particularly helpful for visual learners.
Step #4: Go Over Financial Basics with Your Child
The financial lessons don’t end with a trip to the bank. Tierney emphasizes that parents should continue to teach their children important financial lessons about their savings account. Hartman suggests explaining interest to help children understand the benefits of saving.
Step #5: Set Savings Goals and Reward Good Behavior
Children are more motivated when they have a specific goal, whether it’s reaching a certain amount in the account or contributing a percentage of their chore money each month. When these goals are met, consider rewarding your child with something non-monetary, like a family outing or a favorite meal, to encourage good financial habits in the future.
Laying the foundation for sound financial decisions early on will help your child carry these habits into adulthood.
Here to Help
At Five Star Bank, we’re here to help you and your family build a strong financial foundation. Stop by one of our branches or connect with us online to learn more.
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