Guide to Saving Money for Kids

Q: How do you build wealth for kids?

There are a variety of financial tools you can use to build wealth for your children. Take advantage of things like 529s, trust funds, and savings accounts to teach them the value of saving and prepare them for adulthood.

Q: Average amount to save for a child every month?

The answer depends on how early you’re starting and what you want your child to be able to do with the money you’ve set aside or invested. Assuming your child was just born and you want them to have the choice of attending a four-year in-state school, you might consider saving $250 or more a month. However, this amount assumes your child will qualify for some financial aid and that he or she will take on some debt to complete school.

Q: What is the best account to set up for a child?

Starting early with a 529 can help your child avoid student-loan debt. Being debt-free upon graduation can give them the freedom to explore job opportunities without worrying about making enough to make their student loan payments.

Lauren WardUpdated March 4, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Most parents and guardians know what to do to ensure their children’s immediate well-being and safety. But what about kids’ future needs? One way you can set children up for success is by creating a savings account just for them. There are many types of savings accounts on the market today. Here, we’ll discuss the best ways to save money for kids and why it’s important to teach children about money from a young age.

How Much Should I Save for My Kids?

Saving money for your children’s future can have far-reaching benefits that last long after graduation. The amount you should set aside each month depends on a variety of factors, such as how soon you start saving and what kinds of opportunities you want your kids to have. Let’s start with college, which is on many parents’ mind. Some financial advisors recommend following the ⅓ rule. It recommends that ⅓ of college tuition come from savings, ⅓ from scholarships and grants, and ⅓ from student loans. An online college cost projector can help you determine how much you should aim for in savings. Currently, the average cost of a four-year school with in-state tuition is about $10,400 per year, or $41,600 total. Assuming a 5% increase in costs each year, that same education will cost $107,877 in 18 years. According to the ⅓ rule, parents of newborns should try to put away $35,600 in total, or just under $2,000 per year. Fortunately, there are financial tools that can help families reach this goal a little more easily. Keep reading to learn about the top three. Recommended: Guide to Savings Accounts

Creating a Savings Account for Your Kids

529 Account

Saving money for kids largely comes down to 529s. A 529 account is a specialized savings and investment vehicle that parents can take advantage of as soon as a child is born. While the interest rate is kind of low, the money is tax-free as long as it’s used for educational purposes. Depending on where you live, a 529 may even reduce your state taxes.There are two types of 529s: Prepaid plans and college savings plans. A 529 prepaid plan allows a family member to prepay the costs of in-state college tuition for public schools — meaning you can lock in a lower tuition cost. However, this plan covers only tuition and fees, not room and board or other expenses.The 529 college savings plan is the traditional 529 that most people are familiar with. It allows users to grow and withdraw their money tax-free as long as it is used for college expenses. Those expenses can include a wide range of extras, such as room and board, and textbooks.The best thing about 529s is that there isn’t a federal contribution limit, though there may be a state limit, depending on where you live. Even if your state does impose a limit, it’s likely quite high. Recommended: Using a 529 Plan vs a Savings Account for College

Trust Fund

A trust fund is one of the best ways to save money for kids. Adults can control how the money is to be distributed and what it’s to be used for. For instance, you can decide that your child should receive their funds in regular installments, and that they are to be used for tuition and living expenses while in school. Unfortunately, trust funds don’t come with the same tax benefits as 529s. Still, the high degree of customization makes them a valuable tool for parents and guardians. If you remember how flighty your friends were when they were 18, you may agree that a few rules and restrictions are probably a good thing for young adults. That’s why many parents choose to create trust funds in addition to other savings vehicles.

Children's Savings Account

Many banks offer children’s savings accounts. Adults can use a children’s savings account to teach the value of budgeting. For instance, families can start a tradition that, say, $1 of every cash gift the child receives goes into savings. This will demonstrate that they can’t spend every dollar they have as soon as they get it. Savings accounts can also teach kids the concept and benefits of interest — of savings that grows over time.If your bank doesn’t offer a children’s savings account, you can simply open an additional high-yield savings account in your name and dedicate it specifically to your child’s funds. Once your child is old enough, you can transfer the money to a teen checking account. In between, their money can grow a little. Recommended: Guide to Student Savings Accounts

Building Wealth for Your Children

To truly build wealth for your child, it will take more than a 529. First, as the flight crew advises passengers before takeoff, “Be sure to secure your own oxygen mask before assisting others.” That is, fortify your own financial well-being before your children’s. You’ll want to avoid bad debt, such as high-interest credit cards. And you’ll want to save enough for your retirement, so you’re not relying on your children to cover your housing or medical bills. Some other financial moves to consider include:

Investing through a brokerage account
Protecting your home and property with the right insurance
Purchasing life insurance for you and your spouse

By ensuring your own financial future, you’ll be able to accumulate enough wealth to fund your retirement and leave something to your children.Recommended: How Much Does the Average American Have in Savings?

Teaching Your Kids About Money Management

The sooner you can teach your children about money management, the better. After all, thanks to modern technology, spending has become far too easy. It’s so easy that the idea of money can be hard for kids to grasp. As we routinely make purchases with credit cards, smartphones, even smartwatches, money becomes less concrete, less real. That’s why it’s important to teach children that money isn’t limitless. (In our own parents’ parlance, it doesn’t grow on trees!) While adults are free to buy things that we need or just want, we must steward our money to make sure it’s there when we need it. Talk to your children about money, and be sure to include discussions about income, debt, and recurring expenses. Explain how you plan to save for vacations, eating out, gifts, a new car, and college tuition. From a child’s perspective, a lot happens “behind the scenes” with money. By including them in conversations, they will understand why it’s just as important to save as it is to spend. Recommended: Save Money on the High Cost of Youth Sports

The Takeaway

Trust funds, 529s, and savings accounts can help prepare your children for the future. Trust funds allow adults to determine how the money is distributed and for what purposes it can be used. The big benefit of 529s is that the money grows tax-free. And don’t underestimate the value of a regular savings account in teaching kids about savings, interest, and smart money management. Talking to your kids about money is one of the best things you can do as a parent.

3 Money Tips

Checking accounts are ideal for everyday transactions but earn little or no interest. Savings accounts are better for storing and growing your money — they earn higher interest but often restrict how many withdrawals you can make per month.
To get into the savings habit, consider having 10% of your paycheck directly deposited into your savings account. Or, set up a small automatic recurring transfer from your checking account into your savings account on the same day each month.
To set up a simple monthly spending budget, consider the 50/30/20 rule. This involves splitting your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings.

Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

How do you build wealth for kids?

Average amount to save for a child every month?

What is the best account to set up for a child?

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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