Aug 6, 2007

Savings for Your Child

This post over at The Simple Dollar about starting a savings account for a new baby suggested putting away $5 or $10 a week for the child until adulthood. Trent did the math, coming up with numbers between $9,000 and $39,000, depending on the amount invested, the type of investment, and the age of the child when the account is given to him.

Since Alex and Tyler are still so young, I haven't quite thought through the system I want to use to teach them to manage their own money. I do plan on giving them an allowance, and teaching them to give, save for both short-term and long-term goals, and to spend wisely. But in the meantime, I'm not putting aside money for them to have when they're older. I'm taking any money that I'd give them and putting it in education funds.

But what I have done is open UTMA accounts for them, using money that was given to them or to us to spend on them. Marc and I agree that we can afford to buy the boys everything they need, and they have more than enough toys to play with. The best gift we can give them is to invest the money and let it grow into a much bigger gift than the original. Because the money is in a UTMA, each child will gain possession of his account when he turns 21. I hope that by then, wise money management practices will come naturally to them.

I like that what Marc and I are doing requires no extra investment on our part. We can continue to devote all of our savings for our children to their education; yet when they turn 21, they'll have access to a substantial sum of money that can help them buy a house or pay for grad school. Other ways to save "free money" for your kids are:
  • Sell their gently worn clothing and used toys and books.
  • Sell your own clothing and books if you're not wearing or reading them anymore.
  • Take the money you would normally spend on holiday and birthday gifts for your kids and invest most of it - especially if they're too young to know the difference.


Anonymous said...

This is a great idea! I don't have children yet, but plan on doing this for them, in addition to their college funds.

After seeing charts on compound interest, I wish my parents had put away 25% of the money they spent on me over the years into an IRA. I'd be in much better shape now for buying a home, paying for grad school, or even retirement!

ChiefFamilyOfficer said...

I know - me too! That's why I want my kids to have this when they're adults :)

Anonymous said...

It's a great investment for their future. It could be a back up plan for their education in case of emergencies.
I think it's best if kept as a secret. It doesn't have to trigger a huge expectation on their part.

ChiefFamilyOfficer said...

I actually don't like the idea of keeping it a secret - but then I'm not much a secrets person. I'd much rather have my kids know about it, have them contribute some of their own money to it as they grow up, and discuss what the best use of that money is. It's also a chance to discuss the power of compounding.

Anonymous said...

I think Danni has a point in keeping it a secret. However, we can't just keep it from them. The whole thing is meant for the children and they have the right to know..

ChiefFamilyOfficer said...

Larry - I just don't understand the point of keeping it a secret. They can't have access to the money without parental consent before age 21 (in California; it's age 18 in some states). So wouldn't it be better to discuss the purpose of that money as they grow up? They can watch their balance grow and learn about compounding before they get control of thousands.

JHS said...

The age at which majority is reached in California is 18, not 21. Therefore, unless you create a special trust (such as a "Spendthrift") blocking the child's access until a specified age, they will be able to access any account in their own name at age 18.

I can think of LOTS of good reasons not to tell kids about existing accounts. Just for starters: To make them get out in the world and earn their own way rather than hound the parents for $ that they know is in the bank.

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