But how do you know when it’s the right time to introduce savings accounts to kids? And how can you help them learn how to manage it responsibly? These kinds of questions are a good starting point for teaching kids about money.
The Importance of Savings Accounts for Kids
Opening a savings account may seem like something you can put off until kids are older, but there are benefits to doing it early. Prof. Jaime Peters, assistant dean and assistant professor of finance at Maryville University of St. Louis, told The Balance by email that savings accounts are a great way to kick-start a child’s financial education for a few reasons. “It separates the child from their funds, making it more difficult to spend the money impulsively,” Peters said. “Additionally, the child will receive a little bit of interest, helping them develop a sense that saving can help them earn money.” So when is the best time to get kids a savings account? Generally speaking, as soon as they have money of their own. So if you have preschool or elementary-aged kids, this might take the form of allowance earned for doing chores, cash gifts received for birthdays or holidays, or money earned for getting good grades. Older kids, meanwhile, may have money earned from a part-time job, babysitting, or a side hustle. A savings account can also be a good way to introduce kids to the banking system. “Bank accounts give kids a visual way of seeing their money grow,” Steffa Mantilla, a certified financial education instructor (CFEI) and founder of Money Tamer, told The Balance by email. “It gets them familiar with using a bank and reading a bank statement.” Those are basic financial skills that kids might otherwise not learn on their own or at school. According to the Nation’s Report Card on Financial Literacy, 70% of states earned a grade of C or worse for financial education. You can use a savings account to teach kids foundational concepts, such as:
The difference between saving, spending, and giving. How to make a budget and the difference between needs and wants. What compound interest is and how it works to increase your savings. The importance of setting savings goals.
Opening a savings account for your child is a good chance for you to start an ongoing conversation with them about money. This may be something you yourself missed out on as a kid. In a 2021 National Financial Educators Council poll, 57% of adults say neither of their parents ever taught them about money. As kids get older, you can add things like investing and college and retirement planning into the discussion. You can also draw in other topics not directly related to saving, such as credit, managing debt, and taxes, so kids have a well-rounded financial education.
What It Means To Save For a Specific Purpose
A savings account can teach kids about money but it’s important for them to understand why they’re making the effort to save. “Savings accounts should be created with goals in mind,” Peters said. That goes for kids as well as adults. So as you introduce savings accounts to your child, it’s helpful to walk them through what it means to set a financial goal, how to do so, and how to follow through on that goal.
Establish Savings Goals
Financial goal-setting with kids starts with asking them this question: What do you want to use this money for? The answers can vary by age. The older the kid, the bigger the goal might be. For example, your 10-year-old might want to save money for a video game, while your 16-year-old wants to build up funds to buy a car. Some goals may be short-term, while others may take longer to complete—it’s good for kids to have a mix of both. When asking kids about their savings goals, encourage them to be specific. You can use the SMART method to help them set goals. These are goals that are:
SpecificMeasurableAchievableRelevantTime-bound
So, let’s go back to the previous example of a teen who wants to save money for a car. You can make it specific and time-bound by adding a dollar amount to be saved and a deadline. Say they set a goal of saving $3,000 in 12 months. This goal is measurable because they can keep track of how much they save each month. They look at their monthly $1,000 income from their part-time job and decide it’s achievable because they can afford to save $250 per month. And the goal is relevant because you’ve agreed to match half of what they save, so they’re motivated to stick with it. This can be a more effective way to teach kids how to set savings goals because it can help them develop an action plan. When there’s a plan in place that lets them see their progress over time, kids may be more motivated to stick with their goal.
Set a Good Example With Your Saving
Perhaps one of the best ways to teach your kids about money is to set a good money-management example yourself. Kids need to be able to make the connections between earning money, spending, and saving it to understand what skills are at work. For example, Mantilla said one way to do this is by getting kids involved when discussing a family savings goal, like planning a vacation. You can talk about why you want to save for the trip, how much to save, and what you’ll spend the money on as a family. This is a simple way to make the concept of saving money relevant from a child’s point of view. Once kids have the idea down, you can expand on your discussions by sharing other examples of how you save. This can be as simple as debating the difference between buying brand-name ice cream or generic ice cream at the grocery store. Or you could step things up a notch and share specific numbers from your savings or retirement accounts. This is something Peters said parents shouldn’t be afraid to do. “In our culture, money is both glorified and stigmatized,” Peters said. “It’s ’not nice’ to talk about money, but children will only learn good money habits by being told and having those talks followed by action.” If you’re not comfortable going that far, even a simple visual reminder can help reinforce the idea of savings for kids. Emptying your loose change into a jar on the kitchen counter when you get home, for example, means kids are seeing savings in action every day.
Adapt Lessons as the Child Grows
The approach you use to teach your kids about money when they’re 5 years old isn’t the same approach you’ll use when they’re 15. So it’s important to keep your money lessons relevant and relatable as they get older. For instance, a younger child should be able to grasp the idea of how money is earned and what saving means. You also can help them understand how buying things works—have them watch you give a store money and receive something in return. As kids get older and approach the tween years, you can get into more detail with these concepts. For example, if your child asks you to buy them a $200 guitar, you can break down how many hours you’d have to work to earn enough to pay for it. This way, you’re reinforcing that there’s a trade-off to be made. In order to buy things, you have to work to earn the money first. Once kids become teens, you can start talking about more adult goals like retirement and the different types of savings accounts they might use to achieve their goals. This is where you can get into more detail about banking while also discussing investment and retirement accounts. If you have a minor child or teen with earned income, you could help them get a head start on retirement saving by opening a custodial individual retirement account (IRA) on their behalf. This is also a good time to have a realistic conversation with kids about college. Specifically, that means how much college costs, what resources you have saved for it, if anything, and the pros and cons of using student loans to fund their education. And you can branch off from there to explain that borrowing money means you have to pay it back with interest, which can end up being expensive.
How To Open a Savings Account for Kids
There are different options for opening a savings account for kids. The possibilities include:
Joint savings accounts (that you share with your child)Kids’ savings accountsCustodial savings accounts Education savings accounts
The type of account you choose can depend on the goal. If you want to introduce kids to savings on a basic level, then you might choose a kids’ savings account or joint savings account at your local bank. Mantilla said opening a savings account that offers online and mobile access is a good choice because most kids are tech-savvy already. If you want to help them save for college, on the other hand, you might set up a 529 account or Coverdell Education Savings Account (ESA) instead. For any account you open, you’ll need to provide your name, date of birth, and Social Security number, along with your child’s same information. You’ll also need to make a minimum opening deposit, if required.
The Bottom Line
If you want to teach your kids about money, a savings account can open the door to future financial discussions. As they get older, you can add a checking account or a prepaid debit card for teens so they also have a convenient way to spend while they save.
