I wish I would have known sooner the major importance of building savings at a young age. After spending years of letting our kids blow their birthday money on shopping sprees, we finally decided to start being smart with their savings. Not many parents are aware of savings accounts for kids beyond what their local bank has to offer. Encouraging your kids to save at a young age is critical, there is no way around it. Building any kind of savings for them is a smart move, but you could be leaving money on the table. So what savings accounts should you look into for your kids? Let’s talk about how to start a successful college fund for your child on a small budget.
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Talk to kids about saving
Before you start saving money for them, be sure you are talking to your children about money and the importance of saving.
Many children grow up only hearing about financial struggles. Things like, “We can’t afford that.” or “We don’t have any money.” Even though you may be financially struggling, it’s super important that you encourage your children to grow up with a healthy money mindset.
Remind them of how putting money into savings accounts is beneficial for them. If they want to be “rich” they can only do that by not spending money.
The importance of saving at a young age
Let’s face it, starting anything earlier in life usually gives you an advantage later. Start exercising at a young age and you’re more likely to experience better physical fitness into your golden years. The same goes for building savings.
Take a look at this Dave Ramsey chart that shows the importance of building savings at a young age.
In this scenario, you’ll see two brother’s savings plans. The first brother, Ben, saved $2,000 for 8 years from the age of 19 to the age of 26. His brother Arthur then caught on to the benefits of saving and opened a savings account for himself. Arthur then began to save $2,000 a year.
While Ben stopped saving, Arthur continued saving from the age of 27 to the age of 65. When they both hit retirement, Ben still had more money than Arthur even though Arthur had saved his money for 30 decades longer than his brother.
Why this is important
This simple chart shows the importance of building savings at a young age. If you as a parent are able to help your child save money for only the first few years of life, the lasting effects can go all the way into their retirement if you are smart about how you do it.
There is no doubt that contributing to a Savings Builder account with CIT Bank for your children is the simplest way to get them earning interest on their savings at a young age. And you only need $100 to open one!
While most regular banks only offer around a .05% return on interest, CITbank’sSavings Builder offers a high return of 2.45% when you contribute $100 per month!
When you are first starting to save for your children, a basic account with a lower interest rate will work just fine. When you are ready to open a high yield savings account, be sure you have at least $100 saved up before you begin the process.
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How to start saving at different ages
Saving will look different depending on your child’s age. Here are a few ideas on how you can begin helping your children start to save no matter what their age.
Birth – 5
Take advantage of these early years before children start to really crave toys and presents. Invest money wisely.
Ask for money instead of birthday gifts
Save any financial gifts they are given
Set up automatic withdrawals each month from your account to go into their savings
Baby years savings plan:
Save $100 per month for your child.
After 5 years they will have a savings of $3,000
Put this money into a Savings Builder Accountand continue contributing until they are 18. This account gives you a 2.45% interest rate for only $100 per month!
By the time your child graduates, they will have over $27,000 saved
Age 5-10
These are the years when your children can start being more hands-on with their money and their savings. Be sure to include them in it and let them know if you are helping them save as well. Here are some ideas on how they can start being more involved.
Contribute 30% of their chore money to their Savings Builder
Put half of their birthday and Christmas money into savings
Age 5-10 savings plan
Continue contributing $100 per month to savings
Encourage children to contribute an additional average of $20 per month
This will give your child around an additional $4,000 by the time they graduate
Age 10-18
Now are the years when children can start working to find their own ways to make money beyond chores and birthdays. Encouraging them to find ways to earn money through dog walking, lawn mowing or babysitting is a great way to instill a strong work ethic at a young age.
Start looking for ways to make money
Look for the first job
Start managing their own money beyond savings
Age 10-18 savings plan
Continue contributing $100 per month to savings
Continue to contribute extra $20 from chores and/or birthday money
Begin contributing 10% of paychecks into savings
No matter what, any amount of savings that you can do for your child is going to be beneficial. Make sure to take advantage of great accounts like the Savings Builderin order to get the best interest rate possible!
A dedicated 529 Savings Plan is one of the most tax-beneficial and efficient ways to build a college fund for baby. A 529 plan provides tax-deferred growth, allowing your investments to grow without having to pay taxes on them.
A dedicated 529 Savings Plan is one of the most tax-beneficial and efficient ways to build a college fund for baby. A 529 plan provides tax-deferred growth, allowing your investments to grow without having to pay taxes on them.
A 529 plan is a great way to save for your little one's education, but it isn't the only way. You could put some of your college savings in a 529, some in a traditional savings account, and sprinkle a little more into a Roth IRA.
Your college savings goal should be $60,400 for a public, in-state college; $95,600 for a public, out-of-state college; and $118,900 for a private college. If these numbers seem daunting, don't worry. There are ways to break it down into an achievable monthly contribution.
If your child is simply not sure about college or perhaps wants to delay applying, you can keep your 529 plan intact until the child does use it for qualified education expenses.
For families with multiple children, a helpful practice has been to fund 529 accounts for each child, knowing that leftover funds in one child's account can be transferred to the 529 account of another child should they be unused.
In June 2022, the average 529 balance was $25,903. In June 2021, the average 529 balance was much higher at $30,287. The vast majority of 529 funds are in 529 college savings plans, not 529 prepaid tuition accounts.
Note that there are no eligibility requirements or limits based on income. For many families, 529 plans will be the obvious choice for college savings. Most plans offer age-based investment options that will automatically rebalance, taking more risk as a child is young and less as they approach college age.
It is almost always better to save for college in the parents name. The following table lists the current financial aid treatment of the most common savings vehicles.
California's college savings plan is called ScholarShare 529. It's an investment account that gives you tax advantages when you use it for qualified higher education expenses.
A 529 plan is beneficial for parents who place importance on a college education and want to save money when making financial contributions. The advantages are too good to ignore — contributions grow tax free, and as long as you use the withdrawals for qualified education expenses, they're also non-taxable.
This chart shows that a monthly contribution of $100 will compound more if you start saving earlier, giving the money more time to grow. If you save $100 a month for 18 years, your ending balance could be $35,400. If you save $100 a month for 9 years, your ending balance could be about $13,900.
What if my child gets a full or partial scholarship? If the beneficiary receives a scholarship that covers the cost of qualified expenses, you can withdraw the funds from your account up to the amount of the scholarship without incurring the 10% federal tax penalty on the earnings portion.
Key takeaways. 77% of parents cover a portion of their child's college costs using savings and income. 18% of parents rely on borrowed funds to cover college expenses.
And when you pull the funds out, as long as they're used for qualified higher education expenses, there's no federal income tax on the distribution and often no state income tax. 529 accounts also receive some favorable treatment for financial aid purposes, so they're really a great way to save for college education.
Compared to 529 plans, CSAs have fewer restrictions on how funds are used. They also involve less risky investments given that they are FDIC-insured savings accounts and are not subject to market fluctuations. CSAs provide a local presence through participating banks.
And utilizing a tax-advantaged 529 savings plan—even if that means starting one just a few years before your kids graduate from high school—may be an effective tool to build a college nest egg.
If you want to save more than $2,000 a year for your children's college education, or if you don't meet the income limits for an ESA, a 529 plan could be a better option. But be careful—some 529 plans are no good. Look for a savings plan that allows you to choose which funds you invest in.
Introduction: My name is Stevie Stamm, I am a colorful, sparkling, splendid, vast, open, hilarious, tender person who loves writing and wants to share my knowledge and understanding with you.
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