At TPG, we advocate positive financial behaviors, including paying our bills on time, avoiding interest charges, not spending outside of our means, and protecting our credit score from unnecessary drops.
Some of us learned tips for financial success from our parents, while others learned it the hard way as they matured from their teenage years into adulthood. I fell into the camp that had to learn financial responsibility for myself. And as the parent of a two-year-old, I'm committed to helping my child save and develop good financial habits.
Today, we will go over how to save money for kids to set them up for financial success and be ready to tackle the world once they turn 18.
Give them a piggy bank
Most simply, the best way to save money for kids is to teach them the value of money and saving. A piggy bank or any savings container makes for a good visual for kids to see their money being saved up. And once they've developed a savings habit, you can help them deposit that money into their first savings account.
TPG web publisher Bhawna Khowal got her son a piggy bank a few years ago after he found a couple of pennies lying on the road. She encouraged him to save them, which led to him building a coin collection of around $14 over time. He then used this money to buy his next toy.
Teaching your child how to save money is always an essential skill. It instills in them a sense of understanding and responsibility toward money as well as to set financial goals and work toward those goals to achieve something — whether it be a new toy or a desired savings amount.
Set up a kids' savings account
The best savings account for kids may vary based on your goal, your child's age and your contributions. You may want to open a savings account for your kids at your local bank, but research additional options as well.
Look into factors like online vs. in-bank, age restriction, convenience to operate (website, app etc.), minimum balance required, welcome bonus, APY, monthly or annual fee, investment linking and fund transfer options.
If you have older children, involve them in the process. This will allow them to learn about smart money habits and the importance of saving as well as to compare the different types of accounts available to them.
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Check out this article on our banking partner site for more details on bank accounts and their benefits.
Related: 6 questions to ask before choosing a savings account
Choose the best savings plan for your child
Participating in tax-advantaged savings plans is another way to prepare kids for financial success.
Roth IRA Or Custodial Roth IRA
Depending on the IRA account type, an IRA account allows you to contribute pre- or post-tax dollars into an account. This money can be withdrawn later with or without taxes, depending on your type of contribution.
The biggest eligibility criteria to open a custodial Roth IRA account is that your child needs to earn income, so this is a good option for older kids with part time jobs. Note that the contribution limit for custodial Roth IRAs is $6,500, so your child won't be able to contribute more than this, regardless of what they earn during the year.
The Roth IRA contribution can only be made with post-tax money, so your child won't have to pay tax when they withdraw their money for retirement. When your child reaches age 18 or 21, per state law, their custodial Roth IRA will need to be converted to a regular Roth IRA account.
Related: Custodial Roth IRA: How and why to start a Roth IRA for kids
529 Education Savings Plan
A 529 college savings plan is great for your child's future college costs. Mainly, 529 plans are college savings plans that allow you to invest money in high-return assets like stocks. Additionally, the person contributing to the child's account can take advantage of some tax benefits.
High-Yield savings account
High-yield savings accounts (HYSA) offer higher interest rates than traditional ones, so opening one for or with your child can allow their savings to grow even more quickly. A HYSA often has a minimum age requirement to ensure that children are old enough to understand the purpose and responsibilities of managing a bank account with parental control features. Many have no minimum balance requirement, making this a lucrative option for flexible contributions.
Make your child an authorized user on your credit card
You can add your child as an authorized user to your credit card before age 18, but there are some age restrictions based on the issuer. American Express has a minimum age requirement of 13 years, while others like Capital One, Chase, Citi, and Wells Fargo don't have a minimum age requirement.
Adding your child as an authorized user helps them build credit history so they won't start from scratch once they turn 18. Doing so will give them an established credit history, so things like buying their first car or opening other credit cards in their name won't be as difficult.
As long as your credit card doesn't charge an annual fee for authorized users, there is no downside to adding your child to your card when they are young. As they get older and need access to money, you can set up spending limits and alerts to help them use the card responsibly.
Related: Want to build credit history for your kids? Add them as an authorized user
Help your child choose their first credit card
Investing for kids also means helping them open their first credit card once they turn 18. If they were added as an authorized user to your card, it may be easier for them to be approved for one of our favorite credit cards, such as the Chase Sapphire Preferred® Card, when they're starting out.
But if you weren't able to add your child as an authorized user, they will have limited to no credit history. You'll want to help them choose a card that will allow them to build credit in order to be approved by stronger rewards cards later on.
I was not set up financially by my parents and had to learn about credit through my research. I found that a cash-back credit card was a good place to start, so I applied for one and was approved with a very low limit. I didn't earn a ton of rewards, but the card helped me understand terms such as cash back, statement closing date, minimum payment, and billing cycle. It also taught me responsible spending habits to ensure I could pay off the card each month.
If your child doesn't have the credit score needed for a cash-back card, their best first credit card could be a secured card such as the Capital One Quicksilver Secured Cash Rewards Credit Card. This option allows them to build credit and be eligible for a more premium card later on.
Related: The best starter credit cards
Sign your child up for an airline frequent flyer program
At TPG, we give valuations to points and miles from various issuers and airlines. Points and miles earned from flights can be redeemed for future flights, and because of this value, it's also an area to focus on for your child.
Although you can sign up a child for an airline's frequent flyer program as a newborn, they won't start earning miles until they reach the age of two, when you start purchasing them a seat on the plane. My son is over two years old and has accounts with American Airlines AAdvantage, Air Canada Aeroplan, and Air France-KLM Flying Blue, where he regularly earns miles on his flights.
When your child is old enough to require their own plane ticket, be sure you've signed them up for the airline's rewards program to start building their stash of points and miles.
Related: Earning frequent flyer miles for your kids just got a little easier
Bottom line
If you're wondering how to save money for kids, the good news is that many great options are available. The best way to save money for kids is to invest money in a diverse portfolio of financial products. Savings accounts that earn interest are a good way to earn passive gains on money you've set aside for your little one, whereas long-term planning for financial success requires advanced financial products like a Roth IRA account.
Even if you aren't keen on setting money aside, the best way to set up your child's financial future is to educate them on financial matters from a young and add them as authorized users on your credit cards to jump-start their credit profile from a young age.
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Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
