Starting a family is always an exciting time, but it can also be a financial challenge. From buying birthday presents to paying fees for extracurricular activities, raising kids can be costly. However, there are a number of ways to save money for kids, and it’s important to start saving early on.
“Always begin with the end in mind,” says Alex Klingelhoeffer, a certified financial planner and wealth advisor with Exencial Wealth Advisors in Oklahoma City. The best way to save money for kids will depend on your goals. Whether you want to teach your child smart money-management strategies, help them pay for college, or set them up for financial success as adults, it’s important to start saving now.
Here are Five options to consider:
- Create a children’s savings account.
- Open a health savings account.
- Set aside money in a trust fund.
- Use tools that teach the value of saving money.
- Use a Roth IRA.
Create a Children’s Savings Account
Most banks or credit unions offer children’s savings accounts, which parents can often co-own. These accounts can help children develop a saving habit, rather than a spending one.
Stay infants and toddlers by sprinkling small amounts of money in envelopes around the house, then stash those envelopes in a safe place when they are small enough to not notice them. One of the simplest ways to save for children is to put small amounts of money in envelopes around the house and keep those envelopes safely hidden from babies and toddlers.
Rather than simply handing out a cash allowance, parents of children between ages five and eighteen may want to deposit money into their kids’ savings accounts in order to encourage them to take an active role in managing funds. At a young age, children should be moved into teen checking accounts and issued debit cards. Parents should retain necessary ownership or control over a child’s funds as they age.
Open a Health Savings Account
Regardless of the type of health insurance plan you already have, open and establish an HSA (medical savings account). A health savings account is often the best choice for health care. The types of covers that are least expensive are usually restricted to doctor visits and prescriptions. At the same time, the
Qualified people with high-deductible health plans can set aside $7,300 in a health savings account in 2022 and pay no tax on it unless they withdraw the money for a medical need. The money continues to grow tax-free. At age 65, the person can withdraw the money for qualified medical expenses for himself or herself and up to three children under age 17. Qualified plans are not liberal in the states they are permitted in, and more options would be better.
Persons can contribute up to $7,300 towards a HSA, although this amount can be somewhat limited, but it can streamline your child on the transition of adulthood. The money can be used towards health care costs only, not for other expenses.
If you aren’t eligible to open a Health Savings Account (HSA), you may wish to see if your employer offers a flexible spending account with lower limits. These accounts offer similar tax benefits, but dollar amounts contributed are low, with annual and carryover limits. Most of what one puts into an HSA rolls over, but money in an FSA for health care will be spent in a designated period or be forfeited.
Set Aside Money in a Trust Fund
Parents who wish to preserve their children’s assets may be better off by using trusts in the control of a trustee, a professional chosen by the trust maker. Trusts can be customized, allowing limitations to be placed on how the money is to be used.
Klingelhoffer says that “If money is utilized wisely, [it can be a] successful innate aid to influence and build people’s consciousness. If misused, money is used as a destructive and traumatic amplifier—where a child fritters away the money and it causes more problems.”
It’s possible to create a trust fund from a different device than some other money-making plans. A trust fund can be comprised of any amount of money, but often it makes little sense unless you have a large sum of capital at your disposal. Before forming your trust fund, it’s essential to read over the documents and legal implications. The trust needs to be professionally drafted, and someone needs to be appointed the responsibilty of managing the funds. You can usually complete the documents yourself, but it may cost several
Although a trust fund ensures a child’s assets can’t be used as collateral in a divorce, and it provides more liability protection for parents than if the child received income, wealthy families still benefit most from the strategy. Dollars in a trust fund only have to be managed once; a
Use Tools That Teach the Value of Saving Money
If you are raising kids, the best to great ways of teaching them about saving money include reviewing bank statements with your kids, talking to them about why you are saving and look for ways you can set up tools that can be more effective than simply talking about money.
One way to enhance understanding of money during adolescence is to allow children to own small shares of stock in financially successful companies. Some investment firms allow the sale of fractional shares, for instance, which means even small investors can obtain a piece of stock in some of the richest companies in the world, such as Disney and Apple.
Meanwhile, Stockpile issues gift cards that kids can use to buy stocks without seeing the price. Custodial accounts allow kids to make their own trades without needing a parent or guardian’s approval. Over time, kids can see how the value of the money they save and invest changes, and they can call their parents whenever they want to change their account.
Use a Roth IRA
Certain retirement accounts can be a good idea, so long as you plan on the correct repayment or rules. Feeding your children through a Roth IRA can be a smart idea if you are looking for the best saving plan for child expenses.
Since Roth IRA accounts are tax-free, these are a great way to save after-tax dollars. Young workers are first permitted to open A Roth IRA at age 50 while those 50 and older can contribute $7,000 each year. Money withdrawn after 59½ years of age is tax-free, but withdrawing any gains results in a 10% tax penalty.
As with other tax-advantaged retirement plans, Roth IRAs are beneficial. Account holders can withdraw their money without penalty, and their withdrawals are tax-free. This plan may also help as the person making withdrawals ages or if a child gets a higher education. However, financial planning inordinate inflation is extremely important. if you plan to withdraw the money, and there are insufficient rolls of government bonds to meet the withdrawal, you may need a second source of retirement savings.
There is a significant income limit on the amount that those who use Roth IRAs are able to contribute annually. Income limits begin to phase out for married couples filing jointly at incomes of $204,000. To be able to contribute more than the income limits, people can make a nondeductible contribution to a traditional IRA and then convert it to a Roth IRA.
Young people may also consider their own Roth IRA once it’s time to begin earning money, which they can deposit and use to save without worrying about tax consequences. “We find people usually save what their employer matches,” Renzi says. She may suggest them increase those contributions to achieve additional tax savings. (Costco has matching plans for targeted employees at 50 cents on the
Parents should also make a point to include children in money discussions when appropriate. These may include, for instance, discussing the cost of household expenses or planning to save for a vacation. Finances can be a taboo topic in some households, but it’s important for kids to see and hear these discussions to help them make smart money decisions when they get older