How To Save Money for Kids (for the Short and Long Term) | Stash Learn

How To Save Money for Kids

By: Tara Blaine
Published: Apr 24, 2024
• Updated: Aug 27, 2024

Raising a child can be expensive. There are lots of costs while they’re small, and even more financial considerations in the future when they’re launching into young adulthood. Whether you’re a parent/guardian, family member, or other parental figure in a child’s life, there’s a good chance you’re thinking about their financial future, long before it’s even on their radar.

Research shows that the average cost of raising a child is around $21,681 per year, and the total average expense is nearly $240,000 from birth to age 18. That doesn’t even include considerations like saving money for college, moving out of the house, or starting a nest egg for later in life.

The best way to save money for your child, and how much you should be saving for them, depends on your financial circumstances and goals. Luckily, there are plenty of saving and investing accounts designed specifically to help you save money for kids.

How to save money for kids in the short term

What’s on the horizon for your kids in the next one to five years? Putting aside money now can help you ensure you’ll have what you need for near-term expenses, such as extracurricular activities, childcare, medical needs, and household expenses to accommodate their growth, like new clothes and furniture.

Short-term savings options are also ideal ways to help kids learn how to save for themselves, like putting a portion of their allowance into a kids’ savings account so they can buy that cool, expensive toy they’re eyeing.

There are several options for short-term savings that help you put aside money and help it grow faster through the power of compounding.

Account type	Balance & contribution rules	Usage rules	Withdrawal rules	How money is made	Taxes
High-yield savings account	No limits; money is FDIC insured up to $250,000	Money can be added or withdrawn at any time	Can withdraw from the account six times a month for any reason	Variable interest rate	Interest is subject to ordinary income tax
CD	Typically requires a minimum balance, FDIC insured up to $250,000	A parent or guardian can open a CD on a child’s behalf	Usually, money cannot be withdrawn without penalty until the end of the CD term	Fixed interest rate	Interest is subject to ordinary income tax
HSA	Contributions limited to $7,750 a year (as of 2024)	Can only be opened by guardians with qualified insurance plans	Can only withdraw money for qualified medical expenses or after age 65	Interest and capital gains from investments in securities	Tax-deductible contributions and tax-free growth and withdrawals

High-yield savings accounts

A high-yield savings account functions very similarly to a regular savings account but typically offers a higher annual percentage yield (APY). As of February 2024, the average APY for a standard savings account is 0.46% while some high-yield accounts have APYs as high as 5.25%. High-yield savings accounts have variable interest rates, which could go up or down at any time.

Certificates of deposit

A certificate of deposit (CD) pays a fixed interest rate over a specific period of time; terms are generally between six months and five years. CDs usually have a higher APY than traditional savings accounts, and your return is guaranteed because the interest rate won’t drop.

Health savings accounts

A health savings account (HSA) is a tax-advantaged account that can help you save money for kids’ health expenses. If you have a high-deductible insurance plan, an HSA may be available.

How to save money for kids in the long term

When you’re thinking about your child’s future, consider the really big expenses on the distant horizon like higher-education expenses, long-term financial security, and even starting their retirement savings.

While it often makes sense to keep money for short-term goals in interest-bearing accounts, those interest rates don’t usually keep up with inflation over the long term. Investing can provide returns that beat inflation while offering tax benefits.

Account type	Contribution limits	Usage rules	Withdrawal rules	How money is made	Taxes
Custodial account	None	Anyone can contribute; only the beneficiary can withdraw	Money can be withdrawn by the beneficiary at adulthood	Capital gains from investments in securities	Contributions could trigger a gift tax; withdrawals are taxed as income
529 plan	Varies by state	Varies by state	Money can only be withdrawn for qualified education expenses	Capital gains from investments in securities	Contributions are tax-deductible; qualified withdrawals are tax-free
ESA	$2,000 annually (as of 2024)	Limits based on guardian income and child’s characteristics	Money can only be withdrawn for qualified education expenses	Capital gains from investments in securities	Contributions are post-tax; qualified withdrawals are tax-free
Roth IRA	Up to $7,000 or the child’s income for the year (as of 2024)	A child must make income within the year in order to contribute	Principal can be withdrawn anytime; earnings can be withdrawn at age 59½	Capital gains from investments in securities	Contributions are post-tax; qualified withdrawals are tax-free
Trust fund	None	Varies by type of trust	Withdrawal rules depend on how the account is set up	Can hold multiple types of assets	Taxes vary

Custodial accounts

The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) are two custodial accounts that allow you to invest money on a child’s behalf.

Education accounts

529s and Coverdell Education Savings Accounts (ESAs) are designed to help you save for a child’s educational expenses. 529 plans can be used for qualified education expenses, helping to save less reliance on student loans for starting adulthood.

Roth IRAs

A Roth IRA allows investors to save after-tax dollars for retirement. The annual contribution limit is $7,000 as of 2024.

Trust funds

When you’re exploring how to save money for kids, setting up a trust fund might be an option. A trust fund is a legal agreement managed by a third party that holds assets on behalf of a beneficiary.

How to get your kids involved in saving

Here are a few ways you can teach your kids financial responsibility:

Talk about money with them: Teach them about the principles of financial literacy.
Give them an allowance for spending and saving: Divide their allowance into “spending money” and “saving money.”
Set savings goals with them: Help kids learn the value of saving money by setting specific savings goals.
Open a kids’ bank account: Many financial institutions offer kid-friendly checking and savings accounts.

How to save money for kids: getting started

Here are three simple steps for getting started on your long-term goals:

Written by
Tara Blaine
Tara Blaine draws on over 20 years of experience as a writer to translate seemingly complex financial ideas into insights readers can put to work in their everyday lives.