As a parent, it is crucial to make informed financial decisions to save money for your children. With this, you can ensure proper education and healthcare for your child. How to save money for kids is an important question to get answered. Being prepared for future expenses can help in avoiding any kind of stress and financial concerns. Starting from college, planning for general early career expenses can empower your kids’ future and help them develop good planning habits.
Whether you contribute a low amount, but after years of consistency, this small contribution may lead you towards significant savings for your children. To do so, you need to follow some strategies. Let’s discuss.
Why Saving for Your Kids Matters
When we say saving for kids, this doesn’t just mean financial planning. It is a long-term investment strategy that gives freedom and confidence to you and your family for any financial decision. In the rising education market, it becomes crucial to set some aside to align with this fast-changing world and not compromise with quality of education. With an early start, the extra saving burden gets distributed over a long time, which provides relief from regressive saving.
However, there are some reasons that are enough to save for your kids. Saving smartly is also important to get more out of it. You can start with a secure investment option that will facilitate growth, and you will get to know the power of compounding. If we take an example, saving $100 per month from the birth of your child, will lead to $40,000 till 18 years old with a 6% return rate. Here, your principal amount is just $21,600, and the rest is the investment return. You can use our smart Saving Calculator.
Additionally, the cost of colleges, schools, and commodities is rising with time, so having a dynamically growing savings option can help in competing with this inflation. Without proper planning, managing future expenses becomes very difficult. An early start will not only help in avoiding the burden but also provide security and confidence.
How to Save Money for Kids?
Saving money for your kids is possible and also very simple. By just following some pre-defined steps to start saving separately for kids, you can count on it.
- Financial Goal: Initially, you need to set a goal for which you’re saving. The reason may be college tuition, a first car, future healthcare, or general support. First, define the purpose of saving for your kids.
- Start Early: The earlier you begin, the more time you get for saving, which eventually lowers your financial burden. Also, you can invest this money and get a high return after years of investment.
- Saving Account: It is also an important aspect of saving for your kids. Choosing the best-fit account for saving, which features investment options. Accounts like a 529 plan for education are some highly used savings accounts.
- Automate Contributions: To not delaying or skipping any contribution, use the automation feature. This will automatically debit the amount from your account and deposit it into the savings account.
- Review and Adjust Regularly: Frequently check the account and update any information that you have changed over time. Also, modify the investment if you think that there is a more tempting option is there.
With the help of these effective and simple steps, making a decent saving for your kids won’t be a big task.
Best Accounts to Save Money for Kids
A specially designed savings account sorts out most of the problems. Because they have saving and investment options, one-stop management can be done. There are various accounts listed that you could use for saving money for your kids:
529 College Savings Plan
A 529 college savings plan is sponsored by the state and specifically designed to save for education. The question, How to save money for kids’ education in the USA, is answered here. The main advantage of this account is that the contributions grow tax-free, and you can also make tax-free withdrawals for qualified education purposes such as tuition, books, and housing. Key features:
- High contribution limits
- Investment growth over time
- Can now be used for K–12 tuition and student loan repayment
Custodial Accounts (UTMA/UGMA)
These accounts provide a facility by which you can transfer the assets to your children without needing to set up a trust. It can be used for any purpose related to your child, not just for education. These accounts provide high flexibility over the usage of the saved funds and come with wider investment options as well. This is a great option for parents who are just not saving only for education but for other purposes like a car, business, or home.
High-Yield Savings Accounts for Kids
Various banks provide a separate child savings account with the parent as a joint account holder. This will offer higher growing rates and can be more flexible. Also, these are directly associated with the banks and are FDIC-insured.
These are simple to manage because same as a normal savings account. Great for building positive saving habits and maintaining a decent savings for a short-term goal.
Roth IRA for Children
It can only be available if your children are earning some money, then they can have an individual retirement savings account or a Roth IRA. This offers the best investment plan for a child’s future. A Roth IRA takes contributions from after-tax income, and the qualified withdrawals are completely tax-free.
However, this type of account can be used for long-term goals, because the withdrawals before the age of 59½ can incur an early withdrawal penalty.
Series EE and I Savings Bonds
There are some US government-authorized bonds available that provide low-risk, inflation-protected investment tools. This provides guaranteed returns and is exempt from state or federal taxes. However, as it comes with low risk, the returns are low as compared to other savings account that provides investment options.
Smart Budgeting Tips to Make Room for Kids’ Savings
Many people get confused when it comes to saving separately for their kids. This is because of not having a proper budget that covers retirement contributions and their children’s savings contributions as well. Creating an optimal budget that helps you avoid any misleading.
- One of the most important parts of budgeting is to track your spending. When you have a clear idea of an approximate figure for your monthly expenses, you can easily make contributions separately for your kids’ savings.
- Reduce some not-so-important expenses that are just for doing something necessary.
- If you have some monthly subscriptions to various services like magazines, memberships, etc., then you can stop them and use the internet to read stuff that you want instead of having a physical product.
- Set up an auto-pay feature that helps you to prevent any delay or skipping of contributions into your kid’s savings account.
How Much Should You Save Per Month for Your Child?
In the context, how to save money for kids’ school, it is also important to know how much you should save. But this depends on various factors like your income, monthly expenses, etc. By considering all these factors, the contribution will be made. Below is mentioned a contribution and return estimation, with 6% expected return rate:
| Child’s Starting Age | Monthly Savings Needed | Total at Age 18 |
| 0 (newborn) | $250 | ~$96,000 |
| 5 years | $400 | ~$96,000 |
| 10 years | $700 | ~$96,000 |
| 13 years | $1,050 | ~$96,000 |
Always try to save a decent amount of money for your child’s future. This will be treated as a legacy or significant help for you only to manage the expenses, because when the child grows, their spending and needs also increase.
Common Mistakes to Avoid
After understanding how to save money for kids, people still make some mistakes, which make their goal difficult to achieve. Avoiding such mistakes can make the path clearer than before.
- Not starting to save early is the most common mistake that people make. And then the contribution amount is high to achieve the desired goal. That’s why if you start early, you can get to your goal without affecting your budget for your household.
- Also, choosing the best fit and growth-oriented savings account is very important to empower overall savings.
- In the act of making savings for your kids, don’t forget your finances. Your retirement savings are also important, just as your budget will.
- People don’t review their plan annually, and then the growth opportunity slips from their hands.
Conclusion
Teaching children the importance of savings is very important. How to save money for kids is an easy concern for most families. However, this can be done using a strategic approach. With this act, you are directly reducing your future burden and also generating a good habit of saving for your children. Retirement savings, health care savings, emergency funds, etc., are equally important as saving for your kid. Focusing on all these aspects can ensure you and your family have a secure financial future.
Frequently Asked Questions – How to Save Money for Kids
What is the best way to save money for a child?
The best way to save money for your kids is to open a separate savings account for them. This will help in making a distinct saving with the purpose of your child’s future expenses. There are many specifically designed plan available that provides investment options that make the money grow with time.
What is a good amount to save for kids?
The contribution you make to your kids’ savings depends on your income, budget, and other contributions. It is advised to contribute at least 3% to 4% of your monthly income for your kids’ savings.
Can you open a Roth IRA for a child?
Saving accounts like Roth IRAs are designed for people with income. If you want to open an IRA for your child, then they need to have some earnings. You can either open an account in your name or treat it as a kid’s savings account. You can contribute to it and even invest in various options that help grow the money.
