It’s no secret you want the best for your children. What good parent doesn’t? You want them to have great friends, a solid education, and, in general, the best life possible. One way you can help considerably is by starting a savings account for them and developing a plan to add to it regularly.
Saving for your child’s future should begin as soon as they are born. However, the extra expense of having a child may make saving difficult. But if you put a plan in place, even a small amount each month can add up over the years.
Step #1 - Open Their Own Account
It may seem odd or unnecessary to open an account for a baby or a young child. However, there is one big psychological component that comes into play: If you put money aside for your child in their own account, you’ll be much more reluctant to spend that money yourself.
Let's assume you plan to put $50 per month aside for your child’s future college expenses. You keep this money in your own account, along with your retirement and personal savings. How do you know how much you have saved specifically for your child over the years? What is preventing you from spending that money now with the promise to pay it back later on?
Life happens. You’ll have unexpected expenses and will need access to money. Seeing money in your own account, even if it’s for your child’s college, is easy to spend today and ultimately set back all your hard work you’ve saved for your child. However, going into your child’s own account to take money for a vacation or car repairs will make you think twice.
Step #2 - Make a Plan
When creating a savings plan for your child, it’s important to understand starting as early as possible is to your advantage. If you begin saving when they are first born, you have 18 years to save until they start college. If you wait until they are 5 years old to start, you have 13 years left…and so on. The point is, the earlier you begin saving, the easier it will be.
For example, when your child is born, if you put aside $150 each month until they are ready for college, the balance would be over $32,000 by the time they reach 18. And that doesn’t even include all the compound interest you’ll be earning over 18 years!
Now assume instead of starting early and saving just $150 per month, you wait until your child enters high school. You now have only four years to save for their college education. In order to reach the same $32,000 in the example above, you would have to save at least $8,000 per year! Not to mention all the interest you’d lose out on over those 18 years. Yikes!
Don’t panic if you cannot afford $150 per month. That is perfectly fine. This is especially true if you are dealing with the expenses of a new baby. However, you should get in the habit of saving each month. Put aside $25 or $50 per month until you can afford more. The most important part of saving is the actual act of putting money aside each month.
Step #3 - Put Your Savings on Auto-Pilot
With help from the credit union, you can put your child’s savings on auto-pilot. With mobile and online banking, you can set up your account to automatically transfer money into your child’s account each month.
This feature works by automatically transferring the amount you designate to your child’s account each month or each paycheck you receive. After a while, you probably won’t even notice the $25, $50, or $150 coming out of your account, but you will notice your child’s account balance growing.
Step #4 - Enjoy Compound Interest
When it comes to saving, compound interest is your best friend! Basically, when you put money into your savings account, it earns interest. If you don’t touch this money, you will then earn interest on your original balance PLUS the previously earned interest. When you allow your money to grow over the long-term, this really adds up.
Since your child’s savings most likely won’t be utilized until they reach college age, you should consider longer-term investment options, such as Money Market Accounts and Certificate Accounts. These options provide higher interest rates in return for limited access to your funds. And since you hopefully won’t be touching this money for years, they are the perfect tools to earn more.
If you have questions on setting up a savings account and savings plan for your child, give us a call at 248-322-9800 extension 5 or stop by your local branch and we’d be happy to help!
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