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 one of them mentioned how she’d 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.
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I was intrigued by this, so I went home and did the math on it and a few other account ideas.
Interest rates on savings accounts have been near historic lows since the Great Recession. But even so, if you put $5 away each week from your child’s birth to his 21st birthday into an Ally Bank online savings account that earns .80% APY, your child would have about $6,476 on their 21st birthday. And that’s assuming interest rates hold steady, when in fact it’s quite likely they’ll continue to climb a bit from their longtime lows.
If you put $10 away each week, the child would have almost $13,000. 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 almost $16,000 in it.
Is a savings account too conservative? For financial goals that are 10 years or farther away – long enough that you can ride out the inevitable bumps of the stock market, and not be forced to withdraw the money during a downturn – investing is generally a smarter choice.
Each year, you could roll the savings account into an index fund or a Roth IRA. If it returns an average of 7% a year, you’ll be doing even better: $10 a week until age 25 would yield more than $35,000. It’s rather clear that given the large period of time, you really give compound interest a chance to work its magic.
Why do this? If I suddenly had $35,000 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 turnaround, I’m not entirely sure I would have been mature enough to handle it. Ideally, I like to 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 18, my parents gave me very little financial support – they assisted with textbooks for the first semester or two of college, but after that, it was entirely up to me. I’m trying to prepare my own children to become financially independent adults.
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 high-interest savings account or Roth IRA might be an appropriate choice for you.
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