Children may know what banks are and what they do from TV shows, books, movies, video games or taking trips to their parents’ preferred financial institutions during an errand run. But, the idea of saving can be unclear for the youngest generation.
According to Anne Cheh-Falb, vice president and senior relationship manager at CF Bank in Cleveland, and Ric Rotolo, a financial adviser at Middlefield Bank in Beachwood, this is where children’s savings accounts come in handy.
The end goal reasons for setting up a childhood savings account vary from saving for their first house to their college education. Some families just create accounts to teach healthy money habits, Cheh-Falb said.
“The reason that parents should open up savings accounts for their children is to teach them about money management,” she said. “It’s about teaching them those good habits from the start.”
Rotolo said types of childhood savings accounts differ, and sometimes because of what they’re being used for. For example, families can look into establishing a 529 plan, which is “great” for college expenses.
“Others are just basic custodial accounts, which are good to have for future needs like a wedding or a purchase of a house,” he said. “But helping them set it up and get into the habit of saving their money sets them up for a lifetime of financial wellness.”
Like an adult setting up their own savings accounts, childhood savings accounts need a certain amount of personal information to establish.
“The information you need is their social security number, date of birth and their legal name,” Cheh-Falb explained. “Minors don’t have the legal capacity to enter into contracts, so you’d also want a responsible adult to be the custodian. So, in that case, minors can make deposits but not withdrawals. Anyone responsible can open the account, as long as the minor is listed as a beneficiary.”
Though anyone can open these accounts, Rotolo said it’s most commonly someone in the child’s immediate family – like an aunt, uncle, parent, legal guardian or grandparent. Once a family member or guardian decides they want to open a childhood savings account, Rotolo stated some care should be taken when choosing the bank.
“As far as how to decide and choose the right bank, convenience plays into that but you also want to be at a bank where you feel welcome and accommodated,” he noted. “You are placing someone’s life savings there, so convenience and comfort are key. As far as rates, that is obviously going to be a factor in the long term for how much they’re earning.”
Cheh-Falb noted parents should consider longevity when selecting a bank for their child’s account.
“Find someone who you feel comfortable with as you should have a relationship with your banker,” she suggested. “I opened up a first savings account for a little boy almost 30 years ago now, and now he owns a very large company and still does all his banking with me. If you find someone you’re comfortable with, you can grow with them.”
But of course, children don’t stay children. So, there will come a time where parents will need to cash out the account.
“If you open up a custodial account, once the child reaches 18, technically you can remove your name from the account as a custodian and that account will remain with the child,” Rotolo said. “It was opened under the child’s social security number. So, then it’s now their savings account. It’s very easy. But, 529 plans are a little different. The parent is the owner of the funds and the child is simply a beneficiary.”
For parents considering this life savings option, the professionals had advice.
“Keep what the funds will be used for, keep that endgame in mind,” Cheh-Falb said. “Don’t dip into those funds. Even if the child wants something and says it’s their money. Stand your ground and keep that goal in mind.”
Rotolo said, “Have the child involved and let them see the statements so they can watch it grow over time. Just getting them involved allows them to get fully invested in it.”