By Celeste Lohrenz
You’ve had your baby shower, the nursery is set up, the closet is full of onesies, and you’ve got what seems like a year’s supply of diapers and formula, which will actually only last you a month, and your baby is due any day. The only thing you haven’t thought about is your baby’s long-term financial future. But, maybe you should. After all, it’s never too early to start planning by opening a baby savings account.
If you’re wondering when it’s a good idea to open an account for your child, the answer is it’s never too early. Why? There are several great reasons to start early, and as soon as your baby is born, you’ll have all the information you need to open an account.
There’s no question a baby will have a significant impact on your budget for more than two decades, so you may not have much to save. You don’t have to put away a lot. Compound interest works best the longer an account is open, so starting early is the key. Even if you put away only $10 each week, the account will grow consistently. By the time your child reaches legal adulthood, the account you started at birth could have $10,000 or more, depending on the actual rate of return.
As your child grows, the savings account can become a teaching moment. By teaching your child to save early – like setting aside a portion of allowances or birthday money – you’ll be providing invaluable financial education around saving, budgeting, interest, and balancing. From an early age, your child will see the long-term benefit of regular contributions. It will not only help them understand how and why to save, but also benefit them once they enter the workforce, when they can start contributing to their own retirement accounts. Financial literacy is important, and more than half of young adults say the most valuable course they wish they had been able to take in high school is money management. So why not put your kid on the right track?
Since your child won’t be accessing the account for years to come, you have a long runway for building a great financial base. At the same time, since you’re not withdrawing funds, it can be easy to forget to contribute to it regularly. Consider setting up small automatic deposits into the account to ensure it grows consistently and, if you find you can spare more, you can always increase the deposits or add additional funds on a one-off basis.
Choosing the right account
There are many types of accounts with different interest rates and minimum balances. Check with your local bank to see what options they offer. Some have special programs for children savings accounts that are affordable for parents and geared towards building children’s financial literacy as they grow.
An alternative to a savings account that is specifically earmarked for education expenses, including college tuition, is a 592 plan. At a time when student loans are at an all-time high, starting a college fund early can be a great way to at least partially fund your child’s education. These plans come with the additional benefit of tax-free interest, as long as the funds are used to pay for education-related expenses.
Your child will most likely have a piggy bank at some point, and that’s a great way for them to save some spending money to buy a special toy or video game. But for the longer term, and to really teach them about banking and the value of saving, a savings account it the smarter option. In fact, as they accumulate cash in their piggy bank, you can even encourage them to deposit a portion into the savings account.
As parents, your goal is to set your children up for success. Making sure they have a solid understanding of banking will benefit them for their entire lives, and starting a savings account early comes with a bonus of a potentially large savings account to help them get started on their own or to help pay for college tuition.
While it’s never too early, it’s also never too late to open an account for your child. For more information on what your best options are, contact your local bank’s financial experts.