What's the best way to save money for kids? 6 tips for financial success

By David Rodeck

As a parent, you want to set your children up for a lifetime of success. But thinking about their future can be daunting. There's so much to cover. Where do you even begin?

If you're wondering how to set your child up for financial success, there's a lot you could do. The key is starting as soon as possible, even with small steps. While the best way to save money for kids depends on your personal goals, here are the top options worth considering.

1. Open a children’s savings account

A savings account is the easiest and arguably most popular way to save money for a child, and with good reason. It's simple, inexpensive and effective. You open a savings account on behalf of your child. Any money put into the savings account earns interest to grow over time.

You could open a joint account that you both can access to teach your child how to manage money. That way, your child can use the funds while you keep an eye on things. Your bank could provide tools to help children understand money, like Citizens Savings Tracker®¹.

2. Purchase a certificate of deposit

A certificate of deposit (CD) is another savings account set up for a fixed period. You pick how long you want the CD to last, ranging from a few months to many years. During this time, you earn interest. At the end of the term, you get your money back.

CDs typically pay higher interest rates than other bank accounts. However, if you cancel early, you forfeit some interest earnings as a penalty.

A CD could help you save money for short-term goals with a specific deadline. For example, if you expect your kid to start attending a new private school in two years, you could use a two-year CD to save up for the upcoming tuition.

Tip: Go over your annual budget and consider ways to save more for your kids. For example, perhaps put off a vacation for a year. You'll build up your savings while teaching your children about money by putting long-term financial goals over short-term spending.

3. Invest in a brokerage account

A brokerage account lets you invest in stocks, bonds, mutual funds and other investments. Your return depends on the investment performance and is not guaranteed. In exchange, you could potentially earn more in the long run investing versus savings accounts.

The earlier you start investing, the more your investments may grow, thanks to the power of compound interest. This also gives you time to ride out market swings.

When your children grow up, you can use the brokerage account money to pay for their college tuition, a house down payment or a graduation trip. You could also give the investments to your adult child so they build their own portfolio.

4. Start putting money in a 529 plan

Thanks to its tax breaks, a 529 college savings plan is arguably the best way to save money for kids' future school expenses. You add money to a 529 college savings plan and then invest in mutual funds. While you don't get a federal tax deduction for 529 contributions, you may be allowed to deduct against your state income taxes, depending on where you live.

Investments in a 529 plan delay taxes so long as the money stays in the account. Once your kid goes to school, you can withdraw and spend the money tax-free on qualified education expenses like tuition, room and board, and books. In other words, you avoid owing taxes on your investment earnings.

In exchange, a 529 plan is not ideal for non-school spending. If you take money out for reasons other than school costs, you owe income tax and a 10% penalty on the gains. 

5. Take advantage of a Roth IRA

A Roth IRA lets you save and invest for retirement. If your child earns any income, they could also contribute to a Roth IRA. Income from babysitting, delivering newspapers or working at the family store are a few possibilities.

Investments in a Roth IRA delay taxes. Once your child turns 59 ½, they can take the money out tax-free. They get tax-free retirement income from decades of investment earnings. While retirement might seem a lifetime away, you know from experience that the years can go by quickly. By saving now, you give your kids a massive head start.

Let's say your child saves $10,000 in a Roth IRA by age 18. Assuming a 7% annual return, that'll grow to about $320,000 by the time they turn 68, even if they never contribute another penny.

Tip: If you save for retirement in your own IRA, you could spend the money to pay for your children's college expenses tax-free without owing the 10% early withdrawal penalty.

6. Gift a piggy bank and teach them how to save

A basic piggy bank might seem like a cheap present compared to the other financial accounts on this list, but it could be the most valuable gift of all for your children. While you're saving money, be sure to teach your kids how to save too from their allowance and other earnings.

As part of their education, you can help your kids develop other valuable financial habits through lessons like:

• Budgeting and how to plan where their money goes
• Setting savings goals for the future and tracking progress
• How to deposit money in a kid's savings account and withdraw it
• The importance of donating some money to charity

Start savings for the future now

The idea of your kids growing up can seem scary, but they will be grateful for the head start you are giving them today. For more support, a financial advisor can help you better determine how to set your child up for financial success.

Ready to start saving for your child's future? Open a savings account with Citizens.