Are you looking for an easy way to start saving money for your kids? Whether you have kids or not, saving money is no easy task. You need to be intentional. Avoid extra spending, and stick to your plan.
CNBC found that 53% of parents do not have savings set up for their children, and 27% of parents are saving less for their kids due to the pandemic.
Here are a few tips to help your children secure a financial future.
Create a Budgeting Plan That Works
Having a plan and trying your best to stick to it is essential if you want to start saving money. You don't have to keep track of every dollar you spend or have a 10-page plan for saving money. Your main objective is to calculate how much you can save each month.
List your fixed monthly expenses first, then make a fixed item out of your monthly savings. This is advantageous because you won't be keeping the month's worth of leftovers, which might amount to nothing.
Make it a priority to save for an emergency fund. An emergency fund is 3-6 months of savings for unexpected job loss, injury, or unplanned expenses.
With an emergency fund, you have more resources without sacrificing rent to deal with whatever life throws your way.
Saving is easier when using a regular technique. Putting $100 into your child's savings account might seem like a large step, but putting away $1 daily will get you there in a few months.
A penny doubling every day becomes over $1m in one month! Even though your money will not compound at a doubling rate, small contributions over time can make all the difference.
Many people can save their surplus money. Whether it's your extra money or a portion of your monthly paychecks, you have the choice to save all or a portion of a particular type of income.
Where should you keep your kid’s money?
For savings and investment accounts, there are several different choices.
A variety of benefits and drawbacks are available for each type of account.
Children have access to an investing account with a higher growth potential than a savings account through a custodial account, which is simple to set up with apps like Bloom.
You can buy shares of stocks and ETFs using this kind of investment account for as little as $1, thanks to fractional shares.
Custodial accounts do not have the same restrictions as College 529, which has a contribution limit and is designed for education expenses. In order to use College 529 profits for a non-educational expense, there is a fee.
How Custodial Accounts Work: UTMA & UGMA
UGMA (Universal Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are both custodial accounts held in the name of the minor but supervised by a parent or other relative. The two types only differ in terms of what assets are acceptable. Investing apps like Bloom offer UTMA accounts that enable your child to start investing in stocks, ETFs, and even crypto.
UGMA and UTMA accounts allow parents to save money, invest, and maintain full control until their child reaches the age of majority (18 to 25, depending on the state). Without creating a trust or naming a specific trustee or guardian, you can transfer financial assets to a youngster using one of these accounts.
529 College Savings
When money is invested in a 529 plan and used to pay for educational expenditures, the returns grow tax-free, and withdrawals are also tax-free. This covers tuition, books, supplies, computers, and occasionally accommodation and board for college, university, and other qualified educational institutions (even private elementary and high school institutions!).
Additionally, the IRS permits withdrawals of up to $10,000 annually to cover K–12 tuition costs at public and private institutions. This account's focus on education is its biggest drawback. If your children wanted to use the money for a car or a down payment on a home, there would be charges and taxes to be paid.
Children’s Savings Account
The simplest and least volatile option is a savings account. Any local or online bank will let you open a joint savings account, and most of the time, there are no fees or penalties. Additionally, there are none. The money will be available to your children at all times, and they are free to use it however they see fit.
The absence of growth in a savings account is a drawback. The money will remain in the bank, collecting small amounts of interest per year. The average APY for savings accounts is typically 0.05%, which is less than average inflation (7% annually).
Four Tips for Saving Money for Children
Ensuring your child has a secure financial future is not a one-time step but a continuous effort. You will be successful by letting your intentional efforts to save compound over several years. Here are a few extra tips:
- Helping your children earn their own money can help them understand the importance of money. You might begin by assigning them weekly tasks and a budget. Teach them to save some of their earnings.
- Inform your children about their savings: Your children will learn to value and appreciate money if you show them that you are saving for their future. Tell them why you're intentionally conserving money and how it will help them in the future.
- Don't do everything for your children because they won't be able to depend on you indefinitely. Ensure that they are informed and feel responsible for their savings. A custodial account gives your kids their login and buying/selling decisions.
- Eliminate wasteful spending: When your financial decisions align with your principles, saving money is easier. Determine which of the things you're purchasing doesn't align with your beliefs, make the necessary changes, and put the remaining money into your savings account.
And if you’re ready to take the first steps, you can sign up here to help your teen start investing with Bloom!