Best Place to Save Money For Kids
I recently attended a birthday for one of my kids’ friends, and was blown away by the amount of cash gifts they received. Apparently, giving cash is cool again, and I was impressed by the generosity from mostly family members, but a few family friends, too.
My kids occasionally receive a little birthday money themselves, along with gift cards and other small presents from friends and family. Since it is their birthday, we let them take a little bit of money to the store and pick out a toy or game that they’ve been wanting. But we like to encourage them to save the rest of that money in a variety of places.
Local savings account. Savings accounts at a local bank or credit union are practically a financial rite of passage for kids. While they don’t offer particularly good rates, local savings accounts do offer a great way to introduce kids to banking. Take them along and let them fill out the deposit slips and update their balances at home.
Online savings account. As kids get a little older introduce them to online savings account to score a higher rate on their savings, and to take advantage of other features. I like ING Direct (read my ING Direct review) online savings accounts because they update accrued interest daily on their savings dashboard. It’s a powerful lesson on compounding interest for kids to see money being added to their bank account as they sleep. If you aren’t a fan of ING Direct, check out some other top online banks.
529 college savings plan. Most kids are not worried about paying for college until it comes time to pay for college. So I think it is a good idea for them to contribute a little along the way. Invest a little of this “found cash” for your kids in the best 529 savings plan you can find.
Savings bonds. My kids received some savings bonds when they were little to “put up for college.” Later, I convinced the person that gave them to let us convert them to cash and send to the kids’ college savings funds, where I hope the money will get a better return. Sure, they are interesting and colorful and all that, but apart from novelty there isn’t that makes me want to buy and hold them for the kids over the long term.
Individual, kid-friendly stock. I generally dislike the idea of picking individual stocks because I am not good at it, and because I worry over diversification. However, I think it is safe to take a small percentage of your portfolio, say less than 10%, and invest it in a handful of individual stocks you know something about. Same goes for kids. Not long ago we invested a little money in two companies kids are familiar with, McDonalds and Disney. Later, we might add Coca Cola and Mattel to the mix. Be sure to reinvest those dividends, and hold the stock for the long term. Who knows what a few hundred dollars invested in Microsoft twenty years ago would be worth today.
Where do your kids park their “birthday” money?
Good topic.
One point about the savings bonds–it’s popular for our generation (and our parents) to smile and roll our eyes when the grandparents purchase these for the young’ns.
I understand what you’re saying about converting it to a 529, hoping to get a better return. Maybe, I suppose if the return is particularly dismal on the bond, less than what it would make in an FDIC insured CD of a similar term, then that’s wise. Also, if it’s significant, then the tax implications might also favor the 529 conversion.
But if you’re just converting it because you picked the 529 and you expect the better return there, I don’t think that’s a great idea, honestly.
First, and I think this is important, keeping the bond can only help teach your kids about different types of investments. Second it’s a form of diversification, and the return might very well be priced fairly according to its risk.
Finally, keep in mind when you write “invest in a 529″ remember what the heck you’re actually investing in. You’re not, in fact, “investing in a 529″ but rather purchasing a combination of investments and designating the account for tax purposes under the 529 section of the IRS code.
I sound like I’m being a ninny here, but this is important. It’s this type of misunderstanding that leads people to say “My 401k’s way down! I’m going to stop investing in my 401k, and just put the money in savings.” Many people just have no clue [that you can purchase stable savings funds within a 401k, for example].
And finally, considering what you’re buying within a 529, you’re probably buying a portion of bonds anyway. My kids’ accounts are in the age based portfolios within our state’s plan, and it starts out 80% stocks/20% bonds, then grows more conservative over time.
When my first child was born, her great-grandmother bought her a $5,000 savings bond. I too thought “How sweet, bless her heart. Too bad she doesn’t understand the benefits of stock ownership.” That was in 2007.
When my second was born, I think my mother-in-law mentioned to her that we have 529’s for the kids, and this time she just wrote a check for $5,000, which I immediately sent into the 529 account, in an 80/20 stock/bond mix. That was last March.
Great-grandma has incredible market timing.
We have four children and have had a rule in place since they were old enough to know what money was. Each child has three envelopes in their underwear drawer marked “Charity”, “Savings” & “Fun Money”. Any money they come into whether it be by being paid, birthday, etc. they are to divide it three ways, evenly, between these three envelopes. Charity encompasses tithing for our family but could be donating to any worthy cause. Savings of course goes into their savings account at the local bank, and fun money is for them to spend how they please. Granted 1/3 of your income as blow money would be a bit much as an adult but this approach teaches them discipline early on to tithe, save and have a little bit of fun rather than blow it all as soon as it gets into their hot little hands. If they had handled money this way since they were three years old it will be ingrained in them and will seem natural as they carry money management into adulthood.
Great site BTW.
Fabulous post! I get a bit sick to my stomach when attending parties that have stacks and stacks of toys.
Right now its in a jar….pretty old fashioned I know. They are just understanding what money is and I want them to see it growing. Periodically we take it out and count it. The seven year old “gets it” that her money is growing, so soon it will be time to set up a local savings account with her money. The five year old, not so much, he just sees lots of bills so that equates to him spending it on candy or toy cars. I worry a bit about him. We do let them keep a portion about 20% to spend on what their little hearts desire. the rest goes into the jar.
Great subject! We have a 4 year old daughter… She LOVES to put money in her piggy bank. We’ll let her put change and a few birthday dollars in there, but she also has a CD. We’ve set up the 12 month CD to mature a week before her birthday every year, so when she’s ready (who knows when), I plan on taking it out and giving it to her for her birthday. Hopefully, by that time, I can instill good money management technique and she’ll do something smart with it.
Interesting. But a lot of these options don’t apply unless your kids are getting hundreds or thousands of dollars in cash gifts. When I was growing up, I could count on cash from three relatives. Maybe $50 in total at Christmas.
I don’t have kids, but I love the idea of splitting the money up for different savings. Maybe as they get older teach them to split up the money in percentages so they can have a little fun money, college money, savings or whatever.
Even if they only receive $5 and still split it up, the money will still grow nicely in any account they put it in.
There are two purposes to investing for a child. The first is to allow as much time as possible to let wealth grow through compound interest or other means. The second is to train the child to save voluntarily. While savings bonds might come up short compared to many 529 plans in terms of wealth building, when it comes to the second goal they might do the job better.
There’s a tangible sense of value that goes along with a savings bond. They’re fun to look at, touch, and hold. They’ve got pictures of inspiring people. A young child might not appreciate the difference a single percentage point of interest can make, but he or she can watch savings bonds stack up in a drawer. Somehow the act of saving, and the gradual feeling of achievement, becomes tangible in a way that isn’t as easy with a 529 statement.
There are two purposes to investing for a child. The first is to allow as much time as possible to let wealth grow through compound interest or other means. The second is to train the child to save voluntarily. While savings bonds might come up short compared to many 529 plans in terms of wealth building, when it comes to the second goal they might do the job better.
There’s a tangible sense of value that goes along with a savings bond. They’re fun to look at, touch, and hold. They’ve got pictures of inspiring people. A young child might not appreciate the difference a single percentage point of interest can make, but he or she can watch savings bonds stack up in a drawer. Somehow the act of saving, and the gradual feeling of achievement, becomes tangible in a way that isn’t as easy with a 529 statement.
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Good post– The sooner you get the kids started saving, the better.
It is so important to start the idea of saving right away. Your kids will just start to do it automatically as they get older…nice work!