Save Money for Your Kids: Protect Your Child's Financial Future

Save Money for Your Child: 8 Best Ways to Save for Your Child

According to a 2022 study published by the nonprofit economic think tank Brookings Institute, parents of a kid born in 2015 should budget $310,605 on average to raise them until they are 17 years old.

This comes out to more than $18,000 a year, which may not seem like much, but remember that the sum might go up to twice or three times that if you have additional children.

So, when you decide to have kids, it's smart to start saving money for them. You might need to save money for the enormous cost of going to college and also spending on having a baby (doctor bills, leave without work during pregnancy, stuffing up the nursery).

There are some clever methods to start saving for a child. Consider making these financial decisions to give yourself an advantage while becoming a parent. Now, look at the most popular ways to save money for your child.

What are the Best Ways to Save Money for Your Child's Future?

No matter what your goals are— developing good money-saving habits, helping with college expenses, or simply just understanding them financially for the future—it is important to start saving for your child's future when they are young.

1- Start a Savings Account for Kids

Parents can own a savings account for their kids at many banks and credit unions. These accounts teach kids to save without waste.

Parents may automate allowance transfers to their child's savings account instead of sending their child cash. Besides earning interest, this can teach kids money management.

As kids age, they could get debit cards and be transferred into teen checking accounts. To supervise and support their children with money management as needed, parents continue to be co-owners of teen accounts.

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2- Save for College Using 529 Plans or Prepaid Tuition

Money experts say that a 529 plan is the top choice for putting money aside to pay for college. Many account plans are low-cost and have tax benefits.

Two types of 529 plans exist. A generic college savings plan lets parents finance an account for any private K–12 school or qualified college. Some states allow tax-deductible 529 plan contributions and tax-free withdrawals for qualified school fees.

Alternatives include prepaid tuition plans that lock in public university tuition pricing. Locking up tuition pricing is nice, but most families may prefer college savings.

3- Use Roth IRAs

Giving money from your retirement fund to your kids might seem crazy, but it can be done smartly. If you want the most flexible kid savings option, consider Roth IRAs.

Some individuals put money they've paid taxes on into a Roth IRA for their retirement. In 2023, workers under 50 can save $7,500, while those older than 59 are allowed to save only up to $6,584. Money taken out after 59.5 years is free from taxes, but there will be a penalty tax of 10% if it's done before that time.

Roth IRAs let you take out money without paying taxes or fees, giving them some freedom. You can use money from a Roth IRA to pay for your kid's school or other costs, according to how old you are. Don't empty the account without using 401(k) or additional retirement savings.

A backdoor Roth IRA allows wealthy households to access Roth IRA assets despite income limits. If their income is $218,000 or less, married couples filing jointly cannot contribute to a Roth IRA after 2023. After making a nondeductible regular IRA contribution, they can convert to a Roth IRA to avoid this cap. Remember that kids can open Roth IRAs if they work. 

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4- Create a Health Savings Account

A savings plan for health might be a choice if you have high-deductible medical insurance. A person with a high-cost family health insurance can put $7,750 into savings for medical needs in 2023.

This money is for allowed health costs for you and your kid. No taxes apply to its growth and reimbursement. Like a 401(k) or IRA, assets can be withdrawn at 65 for any reason and subject to regular income tax.

A married couple can open only one health savings account, but anyone can open one and contribute up to $7,750 for each family plan-covered adult kid. This money is limited, but saving for medical bills may help your child mature.

Even if you don't meet the criteria for an HSA, you can use your company's flexible spending account to help with medical costs. FSA money must be spent within a set timeframe or be forfeited, but HSA balances can be invested and rolled over annually.

5- Check ABLE Accounts

Parents with disabled children may benefit from ABLE accounts. Established by 2014 legislation, these accounts are young and will accept $17,000 in 2023. Federal contributions are not tax deductible, but account funds are tax-free. They can be withdrawn tax-free for approved uses.

But that's not the account's biggest benefit. The wonderful thing about ABLE accounts is that they don't count against government assistance. Parents can save for their children without jeopardizing their Medicaid, food, or other benefits.

Only disabled people under 26 can open ABLE accounts. Parents can transfer funds from their 529 plan to their ABLE account up to the annual contribution cap.

6- Create a Depositary Account

A custodial account may be preferable for saving money for your kids until they're adults. Parents can deposit and manage the account until the child turns 18, even though the money is in their name.

Bank of America, Charles Schwab, and Franklin Templeton offer custodial accounts. The Uniform Transfers and Gifts to Minors Acts govern them. The accounts allow kids to possess stocks and other assets they might not otherwise have.

Despite their lack of tax benefits, custodial accounts may be a good choice for parents still determining if their child will attend college or want to give their adult child a financial gift. A child receives custodial funds at the state-mandated age of majority.

Klingelhoeffer stated that automatic transfers may have drawbacks. An adult child can spend money set aside for a goal, like buying a home for other purposes.

If the account is opened when the child is young, you don't have a lot of foresight into whether that child will be responsible.

7- Save Money in a Trust Fund

Parents may use trust funds instead of custody assets to avoid their shortcomings. Trust accounts offer much freedom in drafting, but Stone says they can restrict fund use and access.

Money "is an accelerator." It can help when handled properly, but it also worsens problems for a young person who wastes it on vices. 

Trust funds solve that problem. You can start it with any amount, but it doesn't make sense without much money. Attorneys must prepare trust documents and choose a money manager. You must be ready to spend a few dollars on one.

However, a trust fund allows wealthy families more control over disbursements, protects money from creditors, and prevents divorce from dividing a child's assets.

8- Use Savings-Focused Resources

While helping kids save money is important, parents should also educate them on how to save for themselves. Stone encourages parents to review bank statements with their kids, explore saving reasons, and find practical resources instead of just discussing money.

Introduce complex concepts like investing by letting kids vote on stock purchases. Schwab facilitates fractional share sales, allowing people with limited funds to buy Disney and Apple shares.

The Stockpile app lets kids trade gift cards for stock in their favorite company. The program allows custodial children to manage their accounts and propose stock trades, which their parents must approve. Children can then track their investments and savings.

Parents should also discuss finances with their children when suitable. These could involve discussing home expenses or saving for a vacation. Some families dislike talking about finances, yet children need to hear and see these conversations to make intelligent financial decisions.

Conclusion

So there you have it - how to save money for kids! Sending money for a kid is great, either saving it up when you have one, and they're born or making out with the 529 savings account if that child is already there. Anyway, it's an excellent thought to start right now.

It would be best if you always put your health and future first. Kids have lots of time left to make a career and fix their money, but grownups getting close to retiring don't have much time. They need to arrange things about how they get and save cash fast.

FAQs

What are the most efficient ways for children to save money?

Kids can save money in a trust fund, savings account, ABLE account, and 529 plan. These are the most popular ways for kids to save money. Essentially, it would help if you also taught them the value of saving money and how to manage their finances by creating and teaching them how to create budgets.

How can parents help kids learn about saving money?

Parents can show kids how to save money by being good models. They should talk with their little ones about the family's spending plans and help them set aside part of what they earn or get as an allowance.

What are some fun ways to help kids save their money?

The fun ways to help kids save money are using a transparent jar as a savings tracker that they can see, giving them extra money when they put their own in the bank, and having fun challenges with family members.

At what age should kids start saving money?

There needs to be a specified age at which kids must start saving money. You can teach simple ideas from kindergarten and later more complex money lessons as kids age.

What are the best ways for kids to save money long-term?

Consider things like trust accounts and Roth IRAs for kids for long-term savings for minors. Another long-term option to save money for your kids is to buy low-cost index funds or ETFs in their name, too.

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06 Jan, 2024

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