By the time a child turns 18, the average middle-income family will have spent over a quarter of a million dollars on their upbringing. And that number is rising every year. So it’s never too soon to learn how to save money for kids, even if they’re still on the way. And in this guide, you’ll find a ton of practical advice that will help you fund your children’s education and future.
However, before you start thinking about how much to invest and where, you should be clear on where you stand financially.
Saving Money for Kids — Can You Afford It?
In a perfect world, you’d have all your financial ducks in a row before you even think about having children. But things rarely work out that way.
Most parents try to have some fundamentals in place but don’t have their children’s entire future budgeted out. And that’s perfectly fine.
However, before you start investing and putting money in your children’s savings plan, you should have the following items checked off:
- Understand your budget — knowing how much money you have at your disposal and where it’s going is the first step to any investment.
- Credit score — committing to investments will reduce your cash flow a little, and that may result in needing to finance purchases differently than you otherwise would. A good credit score can help with that.
- Emergency fund — three to six months of expenses is an adequate emergency fund to have at all times and should be in place before you start investing.
Automated Payments as the Best Way to Save Money For Children
This guide will discuss many ways to save money by investing it periodically in financial vehicles. Whenever possible, setting up automatic payments for those vehicles is a good idea.
You can do that in several ways, such as using financial apps. Many personal finance apps let you set and forget automated payments to specific accounts.
By setting up automated payments, you’ll start thinking of the investments as a bill you have to pay. Moreover, you’ll get used to budgeting with that in mind.
How to Save Money for Your Child by Teaching Them to Save
Putting away money for your kids is essential, but the best investment you can make in their future is to instill the right attitude about saving money.
A big part of that is just to talk about money.
Pretending it doesn’t exist or shielding your children from thinking about money is hardly a good long-term plan. Instead, you can gradually move up from piggy banks to key concepts such as interest rates, and good debt versus bad debt.
All this is to say that when you’re looking for the best way to invest for a child, future needs should be explained to them rather than excluding their input.
You can also get a debit card for your children to start learning how to think about their spending without cash-in-hand. This is a great technique. Your kids will learn the value of hard work when they get the allowance payment to their card directly after completing a chore.
On another practical note, you can set up one of several kinds of savings accounts for kids.
- Kids savings account — a standard bank account with joint ownership between you and your child. Either you or your kids can access the funds, and you can set up monitoring options for the account.
- Custodial account — can take the form of a UTMA or UGMA account. Your child owns all the money in this type of account, and it counts as a gifted asset. However, they can’t access the funds until they turn 18.
The Uniform Transfers to Minors Act (UTMA) and Universal Gifts to Minors Act (UGMA) allows parents to set up accounts for their children’s benefit without establishing a trust.
Super Sensible Ways to Save Money for Kids
Moving on to things you can do to provide your kids with a financial foundation, you’ve got quite a few choices. Most of these choices are general in nature, to some extent. But first, we’ll go over some of those choices that aren’t specific to saving money for kids’ college expenses.
A Roth IRA Account for Your Child
A popular way to save for your children’s future is to put money in a Roth individual retirement account in your child’s name. You’ll pay taxes on the funds you put into a Roth IRA. However, the earnings from the account will be tax-free.
If your child is already in their teen years and wondering how to save money as a teenager, a Roth IRA account is one of the best answers.
In other words, when your children eventually withdraw the money from a Roth IRA account, they won’t have to pay income tax on it.
Essentially, Roth IRAs are perfect for people who expect to be in a higher tax bracket when they withdraw the money. That quality gives your kids the chance to invest any income they have while they’re in a smaller tax bracket to enjoy the benefits at a later time.
How to Save Money for Kids with Trust Funds
If you expect to leave a substantial inheritance for your kids, a trust fund may be an excellent option.
In a nutshell, trust funds are legal entities that safeguard assets for their beneficiaries. A trustee manages the assets on behalf of the beneficiaries and gives out those assets according to the person who set up the trust.
It’s an excellent way to protect assets from any legal claims.
The term trust fund is usually associated with high-net-worth individuals, but that’s not necessarily the case. Almost any asset can be part of a trust, so you can set one up even if you don’t have extravagant liquid assets.
Ways to Save Money for Kids College with a Brokerage Account
You can also open a custodial brokerage account under your child’s name. It’s a great alternative to a Roth IRA if your child has no taxable income.
Most brokerage accounts will ultimately have a better yield than a student savings account. Ideally, you should pick an online broker with no account fees and no minimum investment. Additionally, brokers that focus on financial education and tutorials that can help your child learn how to invest wisely.
How to save money for kids the easy way? You can also choose to open the account yourself and name your child as a beneficiary. That way, the assets are yours and won’t affect your child’s chances of receiving aid as much.
High-Yield Savings Accounts Option
Lastly, you can always choose a tried-and-true savings account.
The drawback is that it’s not the best way to save money for kids since you can almost certainly find better returns elsewhere at any given moment. On the other hand, it’s the least-involved and usually one of the safest ways to put your money to work.
Best Way to Save Money for Kids College
The average four-year degree in the United States will set you back at least $25,000. So the sooner you start saving for your children’s education, the better.
Above, we went over some multipurpose ways to save up money for your children and help them to save money for themselves. Now, we’ll talk about some methods and investments that will help most with college and education savings.
529 Plans to Save Money for Child Education
Also known as qualified tuition plans, 529 plans are a form of tax-advantaged financial records.
States and educational institutions sponsor 529 savings plans, and they’re to a Roth IRA that can only be disbursed to pay for qualified education expenses.
Even though they’re state-sponsored, you’re not limited to your home state’s plan. Nor does the plan’s sponsor affect your child’s choice of college in most cases. These plans enjoy numerous tax advantages, which is why they’re popular.
A less popular alternative to the savings plan is a 529 prepaid tuition plan. Prepaid tuition plans allow you to pay for some or all of your child’s public or private education in advance, but few states offer them.
How to Save Money For My Child with Educational Savings Bonds
College savings bonds are another option if you want a safe way to invest money for your child’s education.
Essentially, you can put treasury bonds into a savings account for your children or grandchildren. Selling the bond before it matures usually incurs penalties and discourages using the bonds while your child is still young and doesn’t need the money for educational expenses.
And, cashing in bonds for college expenses affords your child certain tax exemptions. Moreover, you can choose to roll the bonds over into a 529 plan for tax-deferred growth.
Overall, this is an excellent long-term way to help your child cover educational expenses.
Coverdell Education Savings Account
A Coverdell ESA may be the best way to save money for your child if you don’t want a 529 plan. It’s very similar to 529 plans but offers certain advantages. However, 529 plans can receive contributions more readily from grandparents and other relatives, while Coverdell ESAs are best for a parent’s or legal guardian’s contributions.
Coverdell ESAs are more versatile when it comes to investment options. And, they can be used to cover elementary and secondary school expenses, while 529s are restricted to higher education.
What Not to Do When Saving Money for Kids
Knowing how to approach saving for your child’s future is essential. On the other hand, it’s just as important to know what to avoid.
Here are a few things you shouldn’t do if you want to save money for your children successfully.
- Don’t wing it — even if you have some investing experience and you earn a comfortable living, preparation goes a long way. Having concrete plans with target dates and specific savings amounts is a crucial part of saving smartly.
- Don’t wait — the most frequent mistake people make is waiting too long to start saving. People who end up asking how to save money fast for kids are usually the same ones who didn’t start saving on time. Start early, even if you start very slowly.
Avoid risky investments — a solid long-term plan with modest returns is better than a short plan with enormous potential. You don’t need to eliminate your children’s responsibility to themselves completely; just give them a leg up when the time comes.
What is the best way to save money for a child?
There are many to choose from depending on your goals. If you want to secure your children’s financial future Roth IRAs, trust funds, and savings bonds are three often-used vehicles. They all have decent and safe long-term returns.
The best ways to save money for a child’s education include 529 savings plans and Coverdell education savings accounts.
What is a good investment for a child?
A Roth IRA is exceptionally good for children since the contributions from your child can grow tax-free. Your child can also access the growth at any point if it’s needed to finance retirement, education, a home purchase, or anything else.
What is the best way to invest $1,000 for a child?
If your child has taxable income, you can contribute the money to a Roth IRA or a 529 plan. Other good options include brokerage accounts and children’s savings accounts if you want to start teaching your kids about making sound financial decisions.
However, your financial health is directly related to how much you can help your kids. The best use of that money may be to pay down your own debts.
How much should you save for a child?
Experts recommend trying to save about 20–25% of your gross income as a general rule for the average family. That’s not always possible, but any amount of saving will add up in the long run.
If you’re expecting a child, you should know that many of the expenses are front-loaded. You can spend over $20,000 on a child’s needs in the first 18 months. That should come down in time, which will give you a long window to prepare for college expenses.
What are 10 ways to save money for kids?
Here are ten ways you can use to save up money for your child’s future in no particular order:
- Tightly planned grocery can save over $1,000 per year
- Avoid automatic subscriptions
- Invest in a Roth IRA for your child
- Start a savings account for your child
- Update your home’s infrastructure and appliances for long-term savings
- Find alternatives to costly cable subscriptions
- Contribute to a 529 plan
- Set up automatic contributions for your savings accounts
- Selling textbooks your child doesn’t need
- Open a brokerage account for your child
Bonus: If you’re wondering how to save money for kids, the best investment you can make is to give them a solid financial education.
The best time to start saving for your kids’ future is right now. From all the options listed above, the only wrong one is not to save at all.
How to save money for kids can be challenging. But now that you have some fundamentals in place, you’re ready to choose the right one for your family.