5 mistakes to avoid when starting a kids savings account

A man is at the table with his son while the son counts dollars and coins laid out
September 08, 2022 | Lois Sullivan

Taking care of kids is a big job and requires a lot of careful planning. When considering what you might hope for your children's future, you may want to help them prepare financially by establishing a savings account. You might start putting money into it when they're young, teaching good habits and wise financial steps. Your kids can start saving as they get their income sources as they get older. But before you take the first step, review these five mistakes to avoid when starting a kids savings account.

Choosing the wrong account type

Figuring out what type of savings account to open for a child can be challenging for parents. Some parents fail to research options, falling back on a basic account available at the financial institution they use. Other parents choose accounts that may not provide the benefits their children want. Performing research and speaking to a financial professional can help you determine what type of account will best fit your family's needs.

One account type you might come across in your research is a 529 savings account, which refers to a tax-advantaged savings plan that allows participants to save for future education plans. A 529 plan, also known as a qualified tuition plan, receives sponsorship from the state or agencies within its established state. The name of this plan comes from Section 529 of the Internal Revenue Code, which outlines the rules and regulations.

A 529 savings account certainly isn't the only account option for kids. Many parents opt to set up a traditional savings account that their kids can use for expenses other than education. You might choose to set up a 529 account and a high-yield savings account, although your selection ultimately depends on your child's future and whether you want your child to access the funds before starting college.

If you only save money in a 529 account, your child might be unable to use any of the funds for expenses unrelated to higher education. While college may be the goal, it doesn't always pan out for everyone, so it may be worth considering an alternative option. Saving money in a traditional savings account allows the account holder to designate who has access to the funds and when the individual can access them.

When comparing savings accounts, it's worth looking into the interest rate or yield. A high-yield account is worthwhile as the interest can increase the balance over time with no effort required by the account holder. As you continue to add money to the savings account, the higher percentage rate results in a steadier increase. Be sure to research your options before selecting a savings account for your child. 

Not putting enough money into the account

Another mistake that well-meaning parents often make is not putting enough money into the savings account they establish for their children. Putting in a few dollars here and there probably won't build up enough money to pay for your child's tuition and other college expenses. Suppose you decide to put aside enough money for your son or daughter to attend college, buy a car, or make a down payment on a home purchase. In that case, it's wise to figure out what each item would cost and work backward to determine how much you should add to the account regularly.

Not all parents can afford to sock away the money needed for such a significant expenditure, and that's okay too. Make sure you're putting any money you can save for your children in one account rather than keeping funds in different places. It's easier to track and manage one savings account than to figure out how much money you're budgeting for each child among several accounts.

Selecting the wrong investment option

Some savings accounts allow the account holder to determine the investment strategy used for the funds. A traditional savings account may not offer this option, but a 529 plan usually does allow those setting up the account to decide the level of risk they can tolerate. Most administrators of 529 savings plans have implemented age-based investment strategies to benefit the children who will acquire the savings plan set up for them.

Age-based investing adjusts the risk level as the child gets older. When your children are young, it makes more sense to take a more aggressive stance on investing the money in the account as they won't need the funds immediately. But as they get older, reducing the risk helps to protect the money so they'll have it available when they start college. If you have to decide the investment strategy for a child's savings account, it's best to seek advice from a financial professional.  

Paying costly account maintenance fees

Some savings accounts come with high maintenance fees that can eat away your progress toward saving for your child's future. Make sure to look into any costs associated with setting up an account before you sign off. Some financial institutions require savings accounts to maintain a minimum balance, and failing to maintain a minimum balance could subject the account to a fee. This fee is more common, but paying an annual fee to maintain an account is not, so you may want to look elsewhere if you're facing such a fee. 

Waiting too long to make the account a teaching opportunity for kids

It's never too early to start saving for a child's future. You can begin when your child is born, starting a kids savings account that you can add to whenever possible. As your financial situation continues to improve through professional growth and income increases, you may be able to set aside more money. But teaching kids from an early age about the importance of saving is valuable and worthwhile, especially since it can create better money habits for the future.

You can turn a savings account into an ongoing teaching opportunity by talking to your children about the money you're putting into the account. Parents who can financially contribute might offer to match their children's contributions to their savings accounts. As your children get older and earn their own money, you can continue to encourage good saving habits to increase the balance available to them in the savings accounts. 

If you're looking for a high-yield savings account that works for your child, consider the options for savings accounts for kids offered by Alliant Credit Union. One of the options available is a kids savings account designed for children 12 and younger. Participants receiving e-statements for these savings accounts are also exempt from monthly account maintenance fees. Whichever account you ultimately choose, you’ll be choosing a better path forward for your child’s financial future.

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