Starting A Savings Account For Your Newborn

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Last night, I was at a party for several homes in our neighborhood and I had a long conversation with a couple who were completely intrigued by The Simple Dollar. They asked me a lot of questions about it, and also asked a few personal finance questions. The one that really piqued my interest was when the female in the couple mentioned that she had started a savings account for her infant son in his name, was putting $5 a week in it, and was going to continue doing that until his 21st birthday, upon which they would tell him about the account. They started the account the day he was born.

I was intrigued by this, so I went home and did the math on it and a few other account ideas. If you put $5 away each week from your child’s birth to his 21st birthday into an HSBC account that earns 5.05% APY, your child would have $9,441.68 on their 21st birthday. If you put $10 away each week, the child would have $18,883.35. I also considered continuing until the child was 25 in order to spur on a down payment; if you did that at $10 a week, the account would have $25,185.81 in it.

Is the savings account too little? Each year, roll the account into an index fund. If it returns 8% a year (a low estimate), you’ll be doing even better ($10 a week until age 25 would yield $38,952.16). It’s rather clear that given the large period of time, you really give compound interest a chance to work.

Why do this? If I suddenly had $38,952.16 drop on my lap at age 25, I would have immediately had enough for a down payment on a home. We would not have spent years in a very tiny apartment – we could have moved on to a wonderful home earlier than we did. On the other hand, if I had that kind of money dropped on me before my financial meltdown, I’m not entirely sure I would have been mature enough to handle it. Ideally, I would think that I would have used it to pay off my debts, but I’m honestly not entirely sure about that.

Another aspect of the question is what financial support do you feel appropriate giving to your children? Once I turned eighteen, my parents gave me very little financial support – they assisted with textbooks the first semester or two, but after that, it was entirely up to me. I know other families, though, with children in their late twenties who still rely on their parents for many necessities of life. Doing this is in some ways actively choosing to not cut the cord.

When your child is born, one of the first questions you’ll ask yourself is how do I take care of this child over the long haul? A straightforward investment like a savings account might be an appropriate choice for you.

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36 thoughts on “Starting A Savings Account For Your Newborn

  1. i think this is a great idea. having a newborn as a delightful reason to practice the very helpful habit of doing a small sacrifice for a protracted amount of time can benefit them in non-financial ways too, like with their marriage and other relationships.

  2. One of the guys that I went through military training with had that happen. His father put away something like $10 or $20 a week into just a savings account and gave that to him when he turned 18 so he used it as a downpayment on a house.

  3. I think we need to educate our kids along the way and not surprise them with money at 21 or 25 or at any age.

    I have started saving for my kids. Like you, my question is how much? Enough for public school?
    Enough for private school? Enough for a house down payment? Enough for a car? What is appropriate?

    Good blog. Thanks.

    SD

  4. I have promised my 10-year-old daughter that I will fund her IRA in the following way: I will match her wages from her first jobs (when she can legally work, of course) until her IRA has been funded to the amount equivalent to three years full funding. Then I will practice non-attachment. That takes care of my contribution to her retirement.

    Since husband and I will be long-dead before she reaches retirement age, whatever she inherits from us will be a nice, mid-life bonus.

    She already has a UTMA account and 529 that we put money into. She is aware that we are saving for her college and after that, wedding/downpayment on a house. Right now, we are thinking of making this the same fund — the more money on the fairytale wedding, the less for a house downpayment. Reality bites.

  5. I think this is a wonderful idea — AND I think you should do this as well as educate your child along the way.

    You could have the secret account where you drop in the $5/week, and you could also do something like the poster who is using the IRA incentive. These are not mutually exclusive.

    Why do I think this is a good idea? Because I think it’s the parent’s responsibility to teach their children to be responsible — if they grow up knowing about all the money you might have stashed away from them, they might grow up feeling entitled to it. But if you surprise them with it at age 21 or 25, they will hopefully already have good money habits established.

    DB

    P.S. — Ohhh, and please don’t push the notion of a “fairytale” wedding on your daughter. If it’s what she ends up wanting that’s fine, but weddings have become so overdone.

  6. I think this is a wonderful idea. A good friend of mine had several CD’s, savings accounts, etc., her grandparents had opened for her as a baby, and now in her early twenties she was able to buy a car flat-out, and also put a down payment on a house. I think if you raise your child with good finacial sense, a windfall like that in their twenties would be a blessing.

  7. What would the tax consequences on something like this be? I have an ING account, would it just be better to create an extra savings account there and label it with my daughters name instead of actually opening an account in her name?
    If I open it in her name, isn’t it automatically hers at 18 even if I wanted to continue building it till she was 25?

  8. I’m doing this for a best friend’s newborn. Problem is that I’m putting the money into a custodial account at my brokerage. I do $20/month but they take $4 per trade. Perhaps the commission isn’t worth the extra rate of return?

  9. This is a subject my husband and I are currently facing, as our oldest child just entered college and the rest will soon be following. We never saved in a specific “college fund” for our kids, we just saved. And now we have significant savings, but we could blow through it quickly by sending all four children to expensive colleges. On the other hand, I can’t see sending our kids out into the world in debt when we’ve saved well and can afford to help them. But how much help is appropriate and under what conditions? Everything we pay towards educations will not be available for retirement.

    So far we’ve agreed to pay the cost of the local university tuition (& books & fees) if the child lives at home and commutes (about 30 minutes). Our son got unexpected scholarships, so we’ve agreed to put that amount towards living on campus, with our son taking summer jobs to pay the difference. So far, no debt for either us or him.

    Our daughter wants to attend a two year community college, so that won’t be a problem at all.

    Then there’s the question of cars to commute in. After much debate, we bought our son a $3500 used Prizm in great condition, and consider it a contribution to his financial future – it might prevent him from buying a new expensive car upon graduation, and maybe he can get ahead of the game. We’ll do the same for our other kids.

    I’m glad we didn’t designate a specific college fund for our kids. Each of their needs will be different and we’re planning to give accordingly (not necessarily the same amounts), while being fair. They seem to understand the value of this help and don’t feel entitled to the money like they might if the account had their name on it. It gives us more flexibility.

    Also, there are a lot of big expenses that arise before college that a parent should account for – braces, medical care (we have a huge deductible), travel, etc. Can college money be used for these items? What if one child doesn’t choose college, but wants to travel the world – do they get the same money? What if one college is more expensive than another – does the less expensive child get the cost difference in cash? What if he/she wants to start a business – is that worthy?

    I do not think it’s fair to hand your adult child a sum of money and then tell them exactly what they can spend it on. That’s how some wealthy families use money to control their kids and it’s not healthy.

    I advise making those same savings payments into an account in the parents’ names. That gives you the option to help with college, a house down-payment, a business, etc. without the burden (to you or your children) of all those complications. Savings give you options; college funds give you expectations.

  10. For sure, it’s a good idea to save for your kids. However, and it’s a big however, my mother gave me a lump of cash to put a deposit on a house. It did nothing to stop me running up large amounts of debt (being a home owner makes that easier) and I very nearly lost the house and the money she’d give me.

    Gifting money without financial education is a waste. I’d suggest putting $10 a week into a savings account and spending an hour a week discussing personal finance with your kid is a better idea.

  11. What about the disadvantages when looking at college aid packages? If your child has $10K in an account that’s a much bigger thing than if you have $10K in an account!

  12. FrugalPlace: this shouldn’t be the child’s money – it should be in an account that the friend controls. Then, that friend can directly pay for education without worrying about a gift tax because of the education exclusion. This person should keep the account in their name, then dole it to the person in amounts that fall under the gift tax exclusion amount. Then there’s no issue with college aid packages.

  13. You could also open a joint account with your child. Not sure of the tax ramifications, but it does give you some control over the money if that is your concern.

    I think you have to reach a balance between helping out your kids and funding your own retirement. If you pay for everything for them through early adulthood, are they then going to have to pay for you throughout your old age because you did not save enough (and would they be willing to do so)? My mom has always made it pretty clear that her financial goal is to not be a financial burden on us in her old age. She has helped us out by giving us some loans (signed promissary notes and interest charged, although generally only equivalent to what she would have made in her very conservative investments, so a great deal for us, I think). As far as I can tell, none of my siblings feel we are “entitled” to anything of hers. I don’t know what it is about us that makes us think so. I have a close cousin (our moms are sisters), and we were talking finances and the loans from my mom came up. She was APALLED that we had to pay them back. She thought that helping your kids out meant loaning them money, and then if they graduate from university, telling them not to pay it back. Well, sure, that would be lovely, but I think she has helped us out a great deal by giving us low interest rate loans. I don’t know why we see it differently. It may be because my mom has clearly led a frugal life, and we waste far more money than she does, so why should she subsidize us, whereas my cousin thinks her mom just flitters away her money (although her mom has endured quite a few financial hardships of her own).

    Some financial advice I read some years ago suggested that when your kids are young, focus on getting your debts paid off (e.g. mortgage), and then when your kids are in school, you will have retired that debt and can, if you choose, redirect that cash to helping them. In principal I agree with this, but in Canada, RESP (registered education savings plan) money qualifies for a 20% federal matching grant on the first $2500 saved per year (potential $500 grant), and the growth is taxed in the child’s hands, so I would really like to take advantage of that. However, we have massive amounts of debt, and I think it is more important for us to get rid of that at this point, so we are not maxing out the RESPs right now. Fortunately, the match and contribution room carries forward, so once these debts are gone, we can redirect the funds and easily catch up the RESPs. I would love to be able to pay for their first degree, or if they are in a trade, then give them their education money and see it go into starting a business or buying a house. If we were really well off, then sure, I would be willing to do more (e.g. down payment on a house), but I think that this will be the most we can do for them and still fund our own retirement. When they have children, we will probably contribute to THOSE RESPs (which will help the parents by freeing up their cash for mortgages or whatever). I know I would appreciate financial help more now than I would have ten years ago, and I would use it more wisely, so I see nothing wrong with making sure we are doing okay, and then offering help to the kids when they are in their 30′s or 40′s.

    If you are just saving up money, then something a different relative of mine did was have her kids get through their education on student loans or whatever, and then when they completed them successfully, she paid off the student loans (no interest is charged while you are a full time student). I think it is good to struggle a bit. I think one of the biggest problems I have had is that “want it now” thing — where your parent’s current standard of living is what you start out as your minimum standard of living, not realizing all the poor years they went through first.

    It is too hard to say how your kids would react to a windfall when they are infants. If you can do the savings, then super, do it. When you see your kid is responsible, you can hand it over. If your kid is not responsible, then keep it in case you will be bailing them out in the future, or give it only for specific purposes (e.g. downpayment, or offering to wipe out a debt for them or something).

  14. to Margaret:

    The way I look at it is unless you are really not making money, hopefully you can spare an extra $20/month to save for the child. It really maximizes on the power of time to start right away.

    You could cut one night eating out every week to help your child in the future. That’s a good thing.

  15. The best thing you can do for your child is to not be a burden on them in your old age.

    I went to the most expensive college in my state ($35,000/year today) and saw plenty of people barely graduate.

    They often treated it as a 4 (or more) year vacation on mommy and daddy’s dime.

    My kids will be funding the majority of their post-secondary education.

  16. You have to remember the impact of taxes and, more importantly, inflation on those numbers. $20,000 may seem like a lot to us now, but it will be significantly less to them in 20 years.

  17. I don’t know about this plan. I think it is a good idea to start a “rainy day” fund when your child is born, but I wouldn’t earmark that money specifically for college or even for a specific person. Even adjusting for inflation, $20,000 will sound like a ton of money to a 21 year old. If they are surprised by the money they are likely to blow it, and if they count on the money they might feel less willing to get a job, get good grades, settle for a used car, etc. I think that the best gift that a parent can give a child is to provide well for their OWN retirement, so that they are not a worry to their children later. If there is money left over, spend it on community charities. Don’t deprive your children of valuable learning experiences. The “rainy day” savings account should be for true emergencies: surgery, fertility treatments, bail. Not cars and platinum weddings.

  18. I think the smartest thing you can ever do for your kids is to educate them, and to TAKE CARE OF YOUR OWN FINANCES.

    My parents shoved me out the door at 18. They were on the verge of bankruptcy (which they filed later that same year), and did nothing in the way of financial education other than show me what NOT to do.

    They did not have money saved up for me, but being a smart kid, I figured it out myself. And it made me a much better person than other kids my age, away at college on mommy and daddy’s money, not caring how it was used because they hadn’t earned it.

    I think the idea of putting away some money for your kids is only a good idea if you have taken care of your own finances first. Get rid of your debt, control your spending, and make sure you have something saved up for retirement. The greatest gift you can give your kids is the security in knowing that when you get older, they will not have to spend the rest of their lives cleaning up after your financial mistakes.

    Then, educate your kids and let them handle their own finances. Helping is great, but hand-holding creates a generation of people unable to take care of themselves. Give them wings, and then let them make their own decisions and mistakes from there.

  19. We never saved a specific amount for college for our kids but told them we would pay for 2 years of JC and 2 years of a local University, each got a new cheap car, with a long warrenty in high school, could not get them back and forth and could live at home. The most important thing we did was stress the need for a education and while the were young kept the busy with activities to improve their lives, music classes, dance classes, boy and girl scouts so they would not get into trouble. I was told as young parent by the admissions person at a small private university, Chapman, have you kid’s do some thing different when young and if the love it will get you a scholarship.The boy is on a full scholarship for Ballet, also getting a degree in civil engineering, and has been to Boston, New York, Washington DC, and San Francisco all paid for by the dance companies, the oldest just finished in four years at a local Cal State and is starting her first real job. I also have two others one severly handicapped and the other still in high school. They will get out of school with no debt and an understanding of being frugal. They will all get a set amount for their weddings or can use it for the down payment on a house. The only thing that they must do is make sure that their little sister is properly taken care of since she can not take care of herself because we are family and families take care of each other.

  20. Great article.. an issue I ponder almost daily. I figure this my plan. 529 for college to at least get half the cost down. Savings for a vehicle, nothing big 5-10 thousand. A savings for a small down payment on a house, 20,000 and they can finance the rest. I figure that should get a foot in the door. On the otherside, max out my 401 and continue with my IRA account. I dont want to be a burden and I want to enjoy life better when I’m older.

    @ nebraska jess. Same boat as you, my parents never talked about the responsibilities of money, just the hardships. I learned alot by just watching them. The thing is educating is just as important as saving for the child. Example: My wife grew up in a very financially well family. They paid for two years of her college and she opted out of the last two years of the help. Knew she needed to learn to save and work to a goal on her own. Basically said “No thank you” to free money. Her sister had the same options, an “open check book” to any university she wanted, flunked two years and is now at their house doing nothing. Her hand was held through everything and now lacks a drive to achieve.

  21. to db

    I agree that all else being equal, it is a great idea to start tucking away a small, barely-miss-it-from-the-budget amount away. However, in my situation, we are dealing with an embarrasment of debt, so wherever I find those bits of money, eg the extra $20 a week, I am either paying off debt or tucking it into a small emergency fund. If we didn’t have any debts, or if I thought we were just going to keep running up debt as fast as we paid it off, then yes, I would siphon off a bit now for the kids. However, I am confident that we will get this paid off (in a few years), and once it is gone (except probably our mortgage), we can catch up all the “missed” savings with less than one year’s worth of the previous debt payments. I can do this because I know exactly how much I want to have saved for my children’s education — the exact amount that will maximize the matching grants on the RESPs. In my mind, this is an amount just like the mortgage or the credit card debt that must be paid eventually (although I will not beat myself up if we cannot do it — we already have more in the RESPs than I ever received as financial assistance from my parents, not including low or no interest loans from my parents which I paid back in full). Although delaying investments in the RESPs will decrease their growth potential, the lost growth is not likely to be more than the interest that we are paying now on current debts. Also, even if we do not contribute until the very last day they are eligible, my kids will still make a 20% return from the matching grants.

    So my point is that I absolutely agree with the $20 a week plan, but in my situation, I believe I am better off getting my finances in order first.

  22. Nebraska Jess,

    I had the same experience. I received no help from my parents but did get plenty of education in what not to do. They never actually sat me down and taught me about finances but they were great teachers by example.

    I saw them constantly going into massive debt with a dozen+ credit cards and living paycheck to paycheck throughout my whole childhood.

    Because of them, I’ve never maintained more than one credit card and it’s paid off month to month. I pay cash whenever possible. I’m well on my way to having 2mil+ for retirement by fully funding (well almost) my 401k and ROTH year to year.

    Maybe if my parents were different and did give me a lot more help after leaving, I wouldn’t be in such good shape today.

  23. We decided to do this for all 3 of our children they all have accounts for when they turn 21, although we hold the rights not to release the funds until we see fit. If they decide to go to college, down payment on a house or tough financial problems they’ll have the cash available to them. Although we are also trying to teach our children finacial responsibility to avoid ending up in a situation much like our own.

    The way we look at it is it’s a gift to them if they decide to blow it (hopefully not) it’s their own choice and they will discover later on how valuable a gift it was. If they use it wisely it can give them a huge jump start on their life something that wasn’t available to ourselves and hopefully put them in a much better position.

  24. It’s a good idea, but realistically if I’d been handed a no-strings wodge of cash like that at 18 or 21 gawd knows what I would have done with it, and would probably have felt tremendously guilty if I’d let my parents down in how I used it. I did pay my way through my college years and the associated travel and adventures (taxpayer-paid tuition though) and my folks gave me a nice cheque when I got married, which was appreciated and used sensibly.

    Alternate suggestion though: My parents put aside a bottle of poitin (Irish moonshine) when I was born, and gave that to me when I turned 18. It was great! The morning after, not so much …

  25. “If I suddenly had $38,952.16 drop on my lap at age 25, I would have immediately had enough for a down payment on a home. We would not have spent years in a very tiny apartment – we could have moved on to a wonderful home earlier than we did.”

    How much more do you think you appreciate your house after working so hard to achieve homeownership? You’ve had to budget, save and sacrifice. You can compare your new home to the small apartment and appreciate it even more.

    Teaching your kids how to plan and make goals is far more beneficial than handing over a lump-sum.

  26. You people who want to “not be a burden” on your kids when you’re old may be a bit idealistic. My grandmother died when she was 98, and for the last 10 years of her life she lived with my family. My grandmother had money saved up, but the expense for my mom really was very little. What my grandmother needed more than anything was care- someone to take her to doctor appointments, someone to bathe her, someone to force her to exercise, someone to talk to her in her own language. Of course you can pay workers to do these things, but no one could do them with the same love and care as my mom could. I think I would accept fully funding my (nonexistent) children’s college funds if that got them a good start in life and enabled them to care for me in the ways that matter most when I’m old and alone.

  27. What we are doing for our children (ages 2 and 8 months) is putting all the money they receive as gifts into an index fund. This includes money given to us to use for them, since we can afford to buy all of their necessities and they have more than enough toys. Since my older son received more money when he was born (being the first), we noted how much he had immediately after celebrating his second birthday and will make up any difference when the youngest turns two. The money is in a UTMA so they’ll gain possession at age 21 – by which time I plan to have fully instructed them on wise money management.

  28. I think the lesson is lost if this is all that’s done. The money just magically appears at age 18. There was no thrift or sweat on the part of the recipient to earn that money.

  29. It’s the old adage – Give a man the fish or teach them how to fish?

    At age 18 I hoped I had taught my kids the tools and techniques to make (and keep) their own money.
    - Spend less than they earn
    - Save the difference (emergency fund, retirement)
    - Avoid debt like the plague (except for a house and maybe a car)
    - Work hard, get a good education (some debt here too) and keep learning

    If they can grasp that – that’s much better for them in the long-run than a cash gift of $25k or so 20 years from now which will be worth very little after inflation over that period.

    -Frank

  30. For our girls, we have specific college savings, and additional savings, that likely will go toward their college, but everything is in their dad’s and my names, so they can’t fly off with it, and blow it. What we did when they were little, however, is open their own savings accounts for them, and any time they got birthday money or allowence money and it started to accumulate, we headed off to the bank, and they put a large chunk of it in. Any thing that they have wanted to buy over the years, they would have to pay for themselves, like candy, etc..
    We now go to the bank at least once per month, as the older girl has a small part-time job, and also babysits and she doesn’t spend much money (very frugal) and is very excited to see the value of her account go up every few weeks. I told her that since I put the first $50 when she was tiny, I’ll put an extra $50 when she gets that close to CD territory, and she can get a lot more interest if she invests the money in a safe place like a CD. I imagine she’ll use the money eventually for college or a car, but the important thing is that she will have saved her own money for what she wants (outside of the beginnings). Her dad and I have never had any help from his mom or my parents for any aspect of our lives, outside of their love. It would have felt really weird to get a check for $25000 or any large amount toward our house…it keeps your children, well, children. Even though they are adults. Any time they “NEED” something, it would be too easy to hold out their hands, and well, we already have retirement plans, and they don’t include purchasing homes for our kids!

  31. Putting money into a savings account for a long time is probably the worst thing you could do for your kids. First, inflation is going to eat away and interest you receive and you will be actually losing money storing it here. Inflation averages nearly 4% a year, show me a saving account that is going to offer more than that over 18 years. You a better off putting the money into an index fund. Or an ETF. Have faith in the American economy. The stock exchange has averaged 10% over the past 30 years.

  32. In leftwing liberal Canada, persons 18 and over may open a Tax Free Savings Account. But because we elect the stupidest (but richest) idiots we can find, the situation is different for children.
    Children under 18 may not have a Tax Free Savings Account. Children under 18 my only have a non-interest bearing chequing account or a Taxable savings account. Children 0-17 may not have any Savings Account without first having a Social Insurance Account number (which is the number Canada requires for working and paying taxes).
    This is because we elect idiots and every election they keep getting stupider.

    As a child, I had a savings account opened in my name at age 5 without a SIN number.
    We wanted to teach our children the value of saving, but today’s generation probably doesn’t know what I’m talking about.

  33. I am setting aside money for my almost 3 year old son from birthday money and anything I make selling his outgrown clothes at consignments stores. It’s not much (have about $600 in it right now), but I think it will be a help.

    I agree with not giving a huge handout like enough to put a down payment on a house, that I think you appreciate more and teaches you better discipline to do it yourself. But I do remember that after I graduated from college (in 2000) my parents cashed in a whole life policy that they had for me, and I got $5000 – not a huge lump of money, but enough to put a down payment on a car, cover my auto insurance, and helped me cover bills for the first month and a half before I got a job. I would like to be able to give that kind of help to my son when he’s that old. Not hand him a lot of money, but just enough so that he’s not eating ramen noodles while working 3am at McDonalds with 5 roommates until he can land a job.

  34. I’m not hiding my daughter’s savings account from her! What better way to teach her to save?! Why wait to tell her about it?!

    Every week I gather all the ones and quarters in my wallet and set them aside. It averages about $5 per week…sometimes a bit more (this week $10), sometimes a bit less. When she turns two I’m going to take her to open her savings account. Every month we’ll take her savings to the bank and deposit it together. I’m also saving some money from checks she’s received from grandparents to deposit. She won’t understand now what it all means, but I think exposing her to the idea now is a wonderful idea that can only help and definitely won’t hurt!

  35. Our method is simple. My wife and I remember all the money we wasted as youths and what that would add up to today.

    Any $5 bills from great aunts go directly into savings. I give my three year old and will give my 6 month old cash deposits into their accounts for Xmas and Bdays.

    When they are old enough to work, a yet-to-be-determined amount (50%?) of their earning will go to the account.

    I’m not sure when I will dispense. I’ve got at least 18 years to decide.

    College, house down payment, trust fund until they are 65? Who knows?

    Ian

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