How to Save Money for Your Kids

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Money in the bank is one of the most powerful financial tools you can pass along to your children. Whether you're considering a college fund, trust fund, retirement fund or even a simple savings account, every dollar saved can help your child build a more secure and productive future. You can start saving money for your kids at any time and any age by simply creating a plan and contributing money. Here's how to get started.

Ways to Start Saving Money for Your Kids

Of course, saving money for your kids isn't always as easy as it sounds. The many life adjustments that go into having a baby—disrupted work, medical expenses, diapers—make early parenthood a difficult time to sock away money. Unfortunately, this trend can continue well into childhood and beyond: Raising kids is an expensive proposition. But if you can put even a small amount into savings regularly for your child, you can create a growing nest egg and a savings habit that will serve your family well. When your child is old enough to have their own savings, opening a basic children's savings account is a great way to get them started.

In addition to regular savings, consider these ideas for upping your savings game:

  • Set up a trust fund. If you expect to pass along money to your children as an inheritance, establishing a trust and transferring assets such as real estate and investments into it can help keep your assets out of probate when you pass. If you're interested in creating a trust, learn more about the process and consider hiring an attorney to help you set it up.
  • Start an investment account. You can open a custodial account in your child's name under the Uniform Gifts for Minors Act (UGMA) or Uniform Transfers for Minors Act (UTMA). With a custodial account, your child owns the assets but you (or a designated custodian) retain control over the money until your child reaches the age of majority. One caveat: UGMA/UTMA accounts can make it more difficult for your child to qualify for financial aid when they reach college age, since these funds typically count as student-owned assets. Alternatively, you can contribute to your own taxable investment account with an eye toward building reserves you can use to pay for college or help your kids out later in life.
  • Open a Roth IRA in your child's name. A Roth IRA is an individual retirement account that's funded with after-tax dollars. Though you don't get a tax deduction when you contribute to a Roth, your earnings are tax-free and so are your qualified distributions. There is no minimum eligibility age to open a Roth IRA, but your child must have earned income to make a contribution and the contribution cannot exceed their earned income for the year. Still, if you contribute $1,000 to your teen's Roth IRA this year and it earns an average of 7% annually, it will be worth more than $29,000 when they retire in 50 years.
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How to Save Money for College

According to the College Board, the average tuition at a four-year private college reached $37,650 for the 2020-2021 school year; $10,560 at an in-state public university. Add in room and board and multiply by four years, and it's clear why saving for college is a huge financial challenge for parents.

If you haven't already started an education fund for your child, consider starting one now. The more time your money has to compound and grow, the better. And given the enormous cost of a college education, it helps to pay into a college fund over multiple years to help avoid diverting money from your retirement or emergency funds to pay for tuition. The following strategies may help you get started.

Invest in a 529 Plan

A 529 plan allows you to save and invest for your child's education with significant tax benefits. Although contributions to a 529 plan are not deductible from your federal taxes, earnings accumulate on a tax-deferred basis. As long as you use distributions to pay for qualified education expenses, they are not taxed federally. Some states also offer an income tax deduction for 529 contributions. Funds from a 529 may be used to pay for tuition, fees, books, supplies, computers, room and board at an eligible post-secondary institution, or up to $10,000 per year of tuition for K-12 schools.

If you invest in a 529 and your child decides not to go to college, you may be able to use the funds for another qualifying family member's education. Otherwise, you can withdraw your money at any time but may be subject to state and federal income taxes and a 10% penalty on your earnings.

Open Your Own Savings or Investment Account

You can forgo the tax benefits—and potential risk of investing toward a college career that never happens—by putting money into your own traditional savings or investment account and simply earmarking the funds for college. A savings account won't carry any of the risk that investments do, but it won't earn you much interest either. An investment account, by contrast, may grow over time but is subject to the ups and downs of the market.

Use Your Roth IRA Contributions

You can also use funds from your Roth IRA to pay for qualifying education expenses. You can withdraw up to your original contribution amount without penalty if your account is at least five years old. So, for example, if you've contributed $50,000 to your Roth IRA over the past 10 years and it's now worth $70,000, you can withdraw $50,000 without penalty—just not your $20,000 in earnings. The withdrawal counts as income on your next year's taxes, so plan accordingly. And be mindful that if you're intending to use your Roth IRA funds for your own retirement, withdrawing a large chunk of it to pay for college may throw a wrench into your future plans.

How to Build Your Child's Credit

In addition to helping your kids save, you may want to help them learn about and establish credit. There's no hard and fast rule on when your child should begin building credit, but the years following high school graduation may be a good time to start.

There are multiple ways for young adults to get started. Secured credit cards require a security deposit that is used to pay off debt if a cardholder defaults. Student credit cards offer a modest credit line and a range of benefits to give new credit users a start. You may also consider adding your minor child to your credit card account as an authorized user. They'll begin to develop a credit history, though you'll be responsible for paying the bill.

What's equally important is helping your child understand credit: what it is, how it works and how to cultivate it. By stressing the importance of responsible spending and paying every bill in full and on time, you can help instill successful credit habits. Once your child opens a credit account, or becomes an authorized user on your account, they'll get their own credit report. Download a free copy, along with their credit score, and show them how to access that information regularly to check their progress—and spot any early signs of identity theft. On that note, you may also want to check your child's credit file periodically even before they start their credit journey to make sure identity thieves haven't stolen their information and opened accounts in their name.

How to Teach Your Kids to Be Responsible With Money

It's great to save money on your children's behalf, but it may be even more crucial to teach them how to save, budget and manage money themselves. Teaching your kids about finance is a lifelong project. You can begin by modeling healthy spending and saving. Though many of us were raised to be reticent about discussing finances, talking to your kids about money can be groundbreaking. The more they know about how much it takes to fund your daily life, how you manage to save for a vacation, how investments work and why savings are a buffer against stress, the better equipped they'll be to take on life's many financial challenges.

Saving for your kids is a great gift. But ultimately, it grows out of your ability to save for the things that matter to you: educating your children, providing for your own retirement and building the resources your family needs to thrive. By demonstrating the habit of saving and setting money aside methodically toward your goals, you'll give your children the gift of insight along with the dollars you've saved.