Teach your Children to Save! (They will thank you when they are older.)

One thing we can rely on in our lives is change. Many important financial issues come about due to change. Life changes such as marriage, divorce, and death force us to deal with finances in different ways. One of the biggest changes you will experience is having a child. Let’s talk about children’s savings plans.

To start a savings plan for your new bundle of joy you need to have the child’s Social Security number to start their account. I am a little prejudice (I am the Credit Union Guy!) so I would go to a credit union and start a savings account with the minimum balance. Typically, credit unions have very low minimums; often in the vicinity of $20 or less to open a savings account that will have no fees. This makes it easy for young parents to get started.

An important aspect is the vesting or ownership of the account. Whose name should be on it? It is a good idea for you to act as a custodian for your child’s money. A custodial account uses your child’s social security or Tax ID to establish the account rather than your own. As custodian, you have full control of the funds. Any interest earnings will be reported under your child’s name and social security. Your child cannot access the money until you decide to place the funds in their name alone.

If you are banking in the same institution as the one where you opened the child’s account, you can have an automatic transfer of funds from your checking or savings to the child’s account. But you should not start it and forget it. You need to place the dollar amount of that transfer in your budget as if it were a bill and pay it religiously as if it were one of their most important bills. This is because it is important. Studies show that children who have a college savings account from the time they are young are more likely to attend college. It serves as a college incentive to the children and to the parents.

Saving in a savings account is a good idea, but the interest rates on savings are rather low right now. Once a certain dollar amount goal has been reached in the savings account, often $100 is a good target as that is what it takes to initially fund a 529 College Savings Plan. You can transfer the $100 into a 529 and have a much wider selection of investments. You should work with your investment representative to determine your personal level of risk tolerance and select the appropriate investments. If you have younger kids you can accept a bit more risk as time is on your side. You have time to be aggressive with the investments to achieve higher yields and grow the funds. As the child ages, it is a good idea to reduce the amount of money that is at high risk and move it to investments that offer more safety (less risk). As the child gets closer to college age it is important to consider principal preservation in the investment. Moving most of the investment into a money market account at that time would be a good move so you can prevent any investment losses while the student is in college. You will need that money to pay tuition!

For more information on accounts for young people, check out the Meriwest Flow Card Page at https://www.meriwest.com/flow/ . The Flow Card is a debit card for kids that is managed with a parent.

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