Raise Financially Savvy Kids: Start a Savings Account

Your kids are never too young to start a savings account. Consider a joint or custodial account. And don't forget the 529.

My son's first savings account was opened when he was three. He had been saving up money in a jar for years, and we decided that it was time to bring him to the credit union and open a kids savings account.

They gave him a cool ceramic cow savings bank and a pass book. As he reaches various milestones, they provide him with other perks, like T-shirts (he loves receiving T-shirts).

But that's not the only savings account my son has. When ING was running a special a couple years ago, we decided to start a savings account online. And, of course, we contribute to a 529 plan for him.

Encourage Savings

My son enjoys watching all of his account balances grow, especially since he has ownership in his bank accounts. Every time he earns money, whether it's for allowance or for doing small tasks for my home business, 20% of it goes right into savings. He pays his tithing, and his savings, and then he can do what he wants with the rest, although we encourage him to divide his money into short-term and long-term spending goals.

Getting your children to start a savings account can help set them up for life. Not only can they start earning interest, but they develop good habits that can carry over into their adult years. Here are your main options if you want to start a savings account for your child:

Joint Account

Right now, the two savings accounts my son has are joint accounts. He has one with his father, at the credit union, and one with me, at ING.

With a joint account, the money is equally ours. Both people listed on the account have equal access to the money. This means that,?technically, we could raid our son's savings (but let's hope our financial fortunes never fall that low).

Of course, it also means that those assets are also considered ours, too, so we have to pay taxes on the interest (not that the interest income is very large right now). A joint account allows for flexible options for parents as well as children.

But you have to make sure, if you want your child to get off on the right foot, to not raid the account. It requires self-discipline.

Custodial Account

Another option is to open a custodial account for your child. With this type of account, the assets are your child's; you just manage them on behalf of your child.

It's important to make this distinction. Once your child reaches the age of majority, the assets in the account become theirs. You don't have control. A custodial account means that the assets are?entirely your child's. You aren't supposed to withdraw money from the account so you can buy a new Jet-Ski. Withdrawals are supposed to — by law — be used for your child's express benefit.

Your child might also be required to pay taxes on the income from a custodial account. Some parents use custodial accounts as a way to shelter some of their assets while at the same time giving their children a head start in life. However, before you do this, you need to consider the possibility of the kiddie tax, and the fact that a point is reached at which it's not worth it to keep adding to the account.

Plus, a custodial account can affect your child's access to student financial aid later on. Keep this in mind.

Bottom Line

You need to help your child invest in his or her future. Encouraging savings is a good plan. Consider the benefits and drawbacks of a joint savings account vs. custodial savings account, and don't forget about 529 plan options.?Start a savings account for your child, and get him or her to contribute. You want to encourage ownership of a financial future.

How do you encourage your child to save for the future?