Whether you are a new parent, an expectant parent, or the parent or guardian of multiple children, learning about the best way to save money for kids is essential. Saving funds for your young ones will set them up for a prosperous future and teach them the value of money.
Data published by the U.S. Department of Agriculture (USDA) in 2017 revealed the average cost of raising a child from birth through age 17 is $233,610. More recent estimates from the Brookings Institution indicate that typical middle-income families with two children fork out $310,605 to raise a child born in 2015 up to age 17.
The expense of raising a child doesn’t have to be a burden on your life. With thoughtful financial planning, you can look forward to the future and embrace every opportunity without money woes holding you back.
When is the Best Time to Start Saving Money for Your Children?
The Centers for Disease Control and Prevention (CDC) claims that many Americans choose to become first-time parents later in life. In 2021, birth rates for women aged 30–34 climbed 3% to 97.6 from 94.9 in 2020. However, the average for women to become pregnant is 28.
Compared with data recorded in previous years, this is a significant rise in mothering ages, with the average age of first-time mothers resting at 24.9 in 2000 and 26.3 in 2014.
Even during your 20s, experts advise stashing away at least 25% of overall gross income. There are many ways to save 25% of your earnings for your kids, such as investing in a savings account, Roth IRA, or an emergency fund. After all, there are many costs to consider, such as childcare, clothing, healthcare, transportation, and random expenses.
When you learn how to save money for kids, you can easily afford additional expenses as they grow up, such as their hobbies (e.g., rock climbing, dance classes, or art classes) and sports team activities (e.g., hockey equipment or travel expenses for football championships).
Plus, as your child grows, so will their appetite! You can use the money you save to afford weekly food shopping and the occasional treat, such as ice cream and waffles.
Effective Ways of Building a Financial Safety Net for Your Offspring
One of the greatest gifts you can give your child is to prepare them for financial responsibility. It’s never too early to teach your children to develop a positive relationship with money.
Children who learn to manage their money at a young age will become responsible spenders and be more generous in helping others.
Finding the best way to save money for kids involves trying a few tried-and-tested techniques. Here are a few worth thinking about:
1. Create a Budget
Limiting your outgoings is a smart way to save extra cash.
To understand how much you are willing and able to save for your child (as well as how much they can save for themselves, should they be generating any pocket money), develop a financial plan.
The plan should outline your incomings, outgoings, and what you want to spend money on. Once you know how much extra money you’ll have after you pay your bills, you can clearly outline the maximum you are willing to pay for miscellaneous extras, such as eating out, entertainment, etc.
Pop your extra cash into a piggy bank or savings account to reap the rewards in a few years.
2. Open a Child Savings Account
One of the most clever ways to save money for your children is to open a savings account. The market features hundreds of different savings accounts.
The best plans will offer competitive annual percentage yield (APYs) — an accurate measurement of the total interest earned over one year — and include literacy tools that educate children on everything finance-related.
To find a suitable account, visit banks and credit unions for a consultation.
3. Start a 529 Investment Fund
You might have heard of a 529 investment fund, otherwise known as a “529 college savings plan,” before. What you ought to know about these investment funds is that the money is withdrawable tax-free to afford higher education expenses.
Such expenses usually include tuition, school fees, equipment and supplies, study space, computer and Internet access.
4. Open a UGMA or UTMA
These savings accounts for children and teenagers are “custodial accounts.” The Uniform Gifts to Minors Act (UGMA) is allowed in all U.S. states. It transfers money and financial securities (e.g., bonds, stocks, and mutual funds) to minors without establishing a formal trust.
Conversely, custodial accounts under the Uniform Transfers to Minors Act (UTMA) may contain financial and physical assets, such as art, real estate, and jewellery.
5. Pay Into a Roth IRA
A Roth IRA for children generally features all of the benefits of a standard Roth IRA. The only real difference is that it caters to children under 18.
By paying small contributions to a Roth IRA for kids, you can enjoy attractive tax advantages and withdraw your contributions anytime. The longer you leave funds in a Roth IRA, the more value it will generate.
It’s important to note that Roth IRA contributions cannot surpass a minor’s earnings. According to the IRS, the annual maximum contribution per child has increased from $6,000 in 2022 to $6,500 in 2023.
6. Make Minor Lifestyle Changes
You don’t necessarily have to take on a new job to set aside money for your children. Consider giving up some expensive habits or swapping them for less costly practices (e.g., ditching the gym membership for weekly workouts at the local park).
7. Get a Prepaid Tuition Plan
It is possible to start preparing for your child’s education from birth. With a prepaid tuition plan, you can manage future educational costs by paying today’s rates.
Unlike 529 plans, prepaid tuition plans only cover tuition costs and associated fees. Donors, such as parents, grandparents, aunts, uncles, and even close family friends, can add money to the plan.
8. Buy Discounted Items and Use the Savings
Note it in your savings journal whenever you purchase something at a discounted rate. Your child can use this money for educational expenses or one of the above savings accounts.
Let’s say you save 25% on your weekly $100 grocery shop; this means you will save $25. Over one year, that works out to $1300! Even if a shop doesn’t display discounts, you can work magic to get the best deal.
A discussion with the store manager goes a long way, with many high street stores offering a minimum discount of 10% just for asking. Also, if you use online comparison shop tools and sign up for social media updates about company discounts, you will be among the first to know about money-saving deals.
Alternatively, your child can use their student discount card and put the amount saved into a high-yield investment account.
9. Consider Junior Stocks and Shares ISAs
Speaking of high-yield investments, junior stocks and shares are an excellent option for building wealth and educating your kids about investing. Junior stocks and shares ISAs are a tax-efficient option for children under 18.
A wide range of providers offer ISAs of this kind, and even if your knowledge of the market is limited, dedicated account managers can teach your children about the benefits of buying and holding stocks to amass considerable wealth.
10. Open a Trust Fund for Kids
The handy thing about trust funds is that you get to decide why the money is withdrawn before the beneficiary reaches the age of maturity. Most trust funds for children are set up to afford education, medical expenses, and weddings.
Aside from cash, you can also invest in trust funds with assets (e.g. jewelry) and investments.
Pay extra thought to the goals of the trust fund and be careful about who you choose as a Trustee, since this person will be responsible for overseeing the trust’s management and distribution. You can meet with an attorney to launch the trust or do it online.
As a parent or guardian, you must influence your children positively. You are their role model; therefore, your actions impact their personalities and behaviours.
Educating your children about saving from a young age will encourage them to become responsible and independent adults.
Aside from helping your young ones to develop a savings mentality, you can strengthen your overall family bond if you build a financial foundation as early as possible.
Extra money equals extra freedom to enjoy family vacations, indulge in adventurous days out, and bestow gifts upon your young during the holiday seasons.