How To Save Money for Your Children’s Future

Becoming a parent is one of the most costly experiences in life. From childcare expenses to piano lessons, summer sports, and of course, everyday necessities, raising a child is expensive.

And as a parent, you want your child to thrive when they step into the real world. So, you may want to budget for one more expense: your child’s future. 

But there are so many options to save for your child that you may be wondering which is best. Here’s a breakdown to help you get started.

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Open a Custodial Savings Account 

Don’t know where to start saving for your child? Start simple. 

Custodial savings accounts are controlled by a custodian (you, the parent) on behalf of a minor. You, as the custodian, are responsible for managing the funds (or other assets) until your child becomes of age — typically 18 or 21, depending on your state.

These accounts are most commonly referred to as UTMAs (after the Uniform Transfer to Minors Act) and UGMAs (Uniform Gifts to Minors Act). The beauty of both custodial accounts is that they can come in the form of both savings accounts and brokerage accounts.

You can open a custodial account through a bank, credit union, broker, or even a robo-advisor, like Acorns — their Acorns Early custodial account lets you start with just $5. 

Through UTMAs specifically, you can give your child a wide range of assets, including alternative investments like real estate or art — they are not limited to cash investments.

Savings accounts, money market accounts, and CDs 

High-yield savings accounts (HYSAs) are special savings accounts that pay higher-than-average interest. But did you know that some banks let you open a HYSA for your child too?

Our favorite right now is the SoFi Checking and Savings Account, which lets you earn up to 4.00% APY, with no account fees and no minimum balance.

Another option is a money market account. These follow a tiered interest rate structure based on balance — so, the more you have saved, the more you earn.

Lastly, you can look into certificates of deposits (CDs) for your child. CDs are a great option as they are term-fixed deposit accounts and tend to pay higher interest rates. 

You typically can’t withdraw funds without paying a penalty or forfeiting interest, but this should be fine since your intention is for the money to sit there and grow over the years.

Pro tip: Think about automating your savings to set aside a specific dollar amount of your paycheck. This way you don’t have to worry about remembering to actively save for your child and can build your budget around it. 

COMPARE: Best High-Yield Savings Accounts

Brokerage accounts 

Brokerage accounts can also be structured as custodial accounts for your kids. 

The beauty of brokerage accounts is that they can be used to hold investments like individual stocks, exchange-traded funds (ETFs), index funds, or mutual funds. 

Investing funds in the market over the span of your kid’s childhood will give them more time to yield big returns.

You can also choose to be as hands-on in directing the investments as you want. 

If you need help, look at hiring a professional financial advisor. And there are some great robo-advisors out there to do this for you, too. 

Use a Custodial Roth IRA

Here’s a crazy thought: You can start saving for your child’s retirement while you invest for your own! 

You can open a custodial Roth IRA — a retirement savings plan that you fund with after-tax dollars.

For custodial IRAs there are no age minimums, however, a key rule is that your child has to have earned income. The IRS defines “earned income” as taxable wages and income.

In your child’s case, income earned through gigs like mowing the yard, babysitting, and their summer lemonade stand counts. And once your child becomes old enough to have a W2 job, like working in food service or retail, that counts, too.

The custodial Roth IRA has the same annual contribution limit as a regular Roth IRA. It is also similar to other custodial accounts in that you will control the funds on your child's behalf until they are an adult.

Consider a 529 Plan

As a parent, few things will make you sweat as much as thinking about paying for your child’s college. The cost of college continues to skyrocket, making it more difficult to afford without borrowing student loans. 

If you don’t want your child to bear the burden of student loan debt, you should consider opening a 529 plan.

529 plans are state-sponsored, tax-advantaged accounts to be used for qualified education expenses. Qualified education expenses range from college tuition and fees to housing, meal plans, books, and supplies. 

And since 2019, you can also use 529 plans to pay for up to $10,000 of student loans, in the event your child does end up borrowing.

The funds in 529 plans aren’t limited to only college though. They can also be applied to vocational or trade schools and private school tuition.

Establish a Trust 

You don’t have to be raising a “trust fund baby” to open a trust for your child. 

Yes, the reputation of trusts is that they’re only for the super-wealthy. But you don’t have to be in the 1% to open a trust for your kids. 

A trust is a legal entity that can be used to own and control a wide variety of assets from real estate to cash and investments. 

The biggest advantage of trusts is that they are used as tools to shield and protect assets for your kids. This is especially the case in the sad, unfortunate, and hopefully, very unlikely event you pass on while they are still minors. 

Minors can not legally inherit assets. So, if you are to pass on without a trust, the courts will have to assign guardianship to control the assets you leave behind.

To open a trust, it’s highly recommended you get legal counsel to help with drafting the formal documents, and/or speak with a financial advisor. 

READ MORE: What Is Generational Wealth and How Can You Build It, Too?

Teach Your Child To Want To Save 

Let’s be honest — retirement savings accounts, trust funds, and education saving plans are overwhelming. 

But the one thing that is probably the most important is teaching your child financial responsibility. This includes encouraging them to want to save.

Kids are pretty resilient, and personal finance is actually not too heavy of a topic for most school-aged children. The earlier you start instilling good financial habits, the longer your child has to absorb and learn. So, make saving fun!

Here are some ways to do that:

• Do visual representations for them, like teaching them how interest works.
• Set family savings goals, like a “vacation jar” or a “family fun-day fund.”
• Foster some healthy spending habits, encouraging them to save portions of their allowances, birthday money, and other gifts. 
• Classic piggy banks are not only cute but are ways to make it fun, too. 
• If you have a bank account with a brick-and-mortar bank, take them into the bank with you so they can see how check-cashing and depositing money works — and maybe leave with some candy, too.
• Teach cost-beneficial habits, and encourage them to lessen their college burden by applying for grants and scholarships.

Most importantly, try to lead by example. If you have good spending and saving habits, it’ll be even easier for your child to replicate. Don’t be afraid to talk about money with them and the importance of it, too.

FAQs

How much money should I save for my kids?

There is no one-size-fits-all situation, but a great starting point is to set aside 3% to 5% of your monthly net income. Another good way to start is by saving via a custodial savings or brokerage account.

If you are trying to save for college specifically, many experts suggest trying to save what is estimated to be 1/3 of the cost. The other 2/3 should come from scholarships, financial aid, income, and maybe even student loans.

What are the best investments for my kids?

Savings bonds, index funds, ETFs, and dividend stocks are among the best investments for kids. 

Index funds, ETFs, and dividend stocks can be held in 529 education plans, custodial Roth IRAs, and custodial brokerage accounts.

TL;DR: How To Save Money for Kids

Your child’s future is one of the most important things to you. And you want nothing more as a parent than to set them up for financial success. So start saving for them now.

Custodial savings and brokerage accounts, 529 education plans, Roth IRAs, and trusts are among the best ways to save. 

But teaching your child about saving is the most important. Model good financial habits for your child. You may call yourself mom or dad, but you are a superhero in their eyes, after all. 

For more tips on setting your family up for financial success, check out these episodes of the Erika Taught Me podcast:

• How To Set Your Kids Up Financially
• How to Become Better With Money
• Money & Investing Pitfalls to Avoid

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