As a concerned parent, the financial well-being of your children should be just as important to you as their education and health. In many ways, the three are even closely related to each other and should always be considered as a package. This means that the question of finding the right bank account for your children has direct repercussions on anything from their ability to budget to a deeper understanding of the workings of personal finance – which makes it all the more important that you’re aware of the different options at your disposal. Before actually opening the savings account, it is vital that you evaluate keenly the pros and cons of savings accounts for your kids. This will enable you to make an informed decision and prepare your children for a sound financial future.
Advantages of Children savings accounts
Saving is a discipline that children needs to be taught at a very early age. It may therefore be more practical for you as a parent to open an account for your children at a time when they can not yet do so themselves. This will also provide them with the opportunity of learning how to manage a savings account and teaches them about the importance of financial independence at an early age. Some of these points may sound slightly trivial. And yet, they’re anything but. As financial expert Martin Lewis, in an article on children’s savings accounts , put it: “The simple money lesson for younger children is obvious – put your cash in the bank and it’ll grow. Yet as they get older there’s another valuable lesson to be learned. A bank’s job is to make money from you – our job is to try to keep our cash. This may sound like a tough message to teach kids, but it’s crucially important. The banks would like us to say “put your money in the bank”, not “it’s which bank you put your cash in that counts”.
Another advantage is that a parent will not always be there in the future to take care of their child hence opening of a savings account for your child can be a way of transferring wealth to your children. If your children have already learnt about saving at an early age, they are better placed to use the money well since it is money they have saved with the assistance of their parents. Most banks do not require a minimum balance so that the money can start earning interest. The money starts earning interest immediately it is deposited in the account. The child can therefore acknowledge the benefit of saving since their money is increasing each day due to interest earned on the deposit. When the child is an adult and they already have accumulated enough savings to finance their years in college or invest in business. This minimizes the over-dependence on pocket money from parents even for minor items such as personal care items. They can build up on their savings and continue depositing money into their savings account. Lewis refers to this principle as the difference between piggy banks and real banks and offers a charmingly simple explanation you can offer your children: “Put your cash in a piggy bank and it sits there, but put it in a real bank and you’re actually lending them your money – so they need to pay you for it. The amount you’re paid is called interest. The higher the interest on savings and the longer you keep it with them, the more they are paying you. If the interest is 10%, that means they pay you 10p a year for every pound you save with them.”
Disadvantages of Children savings accounts
Of course, for children’s savings accounts to work and indeed be better than depositing money in a piggy, they actually need to earn some money. In this regard, many current offerings by most banks are disappointing. As Jill Papworth put it in an article for The Guardian: “Children’s savings accounts are, on the whole, dreadful. The big banks pay as little as 0.25% interest a year, hardly an incentive for children to learn the savings habit.” Although there were more attractive offers around – Papworth indicating that “a little bit of searching around” could yield “children’s accounts paying 3% interest, and Junior Isas as much as 6%” – it required work and first informing oneself in-depth about the backgrounds of different kinds of savings accounts. Her analysis is nonetheless highly enlightening for anyone interested in the topic and can be found here.
Another important disadvantage are the limitations when it comes to withdrawal. One can typically merely withdraw the money a number of times after which one may have to pay a penalty. This can be quite disadvantageous especially if there is an urgent need for the money.
There is also a psychological danger attached to a children’s savings account: As money is put into the savings account, it gradually increases over time. This may therefore lead to a large amount of money being in the account when the child grows up. This may either cause a young adult to spend all the money at once on a sudden impulse rather than using it responsibly – or to loose motivation in pursuing ambitious career goals, since there a financial safety net is always at hand. It is therefore advisable for you to speak to your children about what they might do with the money once it becomes available to them.
Alternatives and Conclusion
With these points in mind, it may be advisable to start thinking about alternatives to a children’s savings account. A guaranteed bank account, for example, also offers the typical benefits associated with a children’s savings account: It teaches your children about budgeting responsibly, demonstrates the value of their money and stresses the importance of avoiding debts. You should be aware, however, that such an eccount will not provide for an interest-led-capital-growth and will most likely incur a monthly fee. On the other hand, this also stresses the point that banking is never entirely for free.
In all cases, it is the responsibility of the parent to evaluate all the advantages and disadvantages of savings account before settling on either option. Every parent wants to give their kids the best life has to offer and always endeavors to ensure the future of the kids is safeguarded. As we’ve shown, meanwhile, there are plenty of sensible options at your disposal – since the well-being of your children is vital to you, any informed decision is all but sure to be a good one.
By William Masters
This article was written in association with financial service provider eccount money, one of the UK’s leading companies for bankruptcy bank accounts.
William Masters has established himself as a leading journalist for topics of international economics and personal finances. He reports directly from London’s financial heart and has contributed to a wide range of online publications.