Saving money: You should start planning for your kids as early as birth, but the dollar amount is debatable

As a general rule, when it comes to savings plans, the earlier you start the better. 

This holds true for things like buying a home, paying for a wedding and more long-term plans like saving for retirement. It’s also true when it comes to saving for your children. While it may feel like you have plenty of time to set aside money for your children, waiting too long can make a savings plan a far away thought. Establishing a savings plan early can help create a financial cushion for your children, by putting just small amounts away at a time.

When should you start saving? 

The answer depends, but it’s best to start putting small amounts aside when you decide to have a child to save yourself from stress down the line. Raising a child is expensive. It costs $310,605 on average to raise a child from when they are born until they are 18, and this number doesn’t account for college costs, according to Fidelity.

Another aspect to consider is that while you put aside money for your child early on, you can simultaneously teach them about money-saving habits to use in the future. When they are young, getting them some version of a piggy bank and teaching to set aside money instead of spending right away can help establish good habits from a young age.

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There are various ways you can begin saving money for your children. Read on to determine which method is best for you.

1. General savings
2. Certificate of deposit (CD) account
3. Custodial account
4. 529
5. Roth IRA
6. Health savings account (HSA)

1. General savings

Perhaps the easiest way to start saving for your child’s future is by opening a general savings account. A child of any age can have this type of account, as long as the parents serve as the primary or joint account holder. 

Savings accounts are very easy to open and start depositing money in. If you already have a savings account opened for yourself, you can simply open another account through your bank for your child. You can choose to deposit money into these accounts manually or set up automatic transfers. 

When shopping around for banks, look for ones with high-yield savings accounts for more return on the money being put in. 

Keep in mind that with a savings account, both you and your child technically have access to the account if it is under both names, for both deposits and withdrawals. 

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Opening a savings account dedicated to your child when they are young is an easy start to their financial journey. You can even open an account like this before your child is born. That way, you’ll have money put aside early for any newborn-related expenses – such as setting up a nursery, clothes, toys, etc.

2. Certificate of deposit (CD) account

A certificate of deposit, or CD, is similar to a savings account, with a few slight differences. With a CD, money put into the account is essentially locked away for a predetermined period of time. In exchange, CD accounts traditionally offer higher rates of return. 

You have to be over 18 to open a CD account, so a parent will need to open one in their name for their young children. CD accounts are great for saving, since money can’t be withdrawn without penalty for a period of time, making it easier to build up funds if you are often tempted to withdraw money.

3. Custodial account

Opening a custodial account is a way for adults to invest money for their children. Through a custodial account, money can be invested in stocks, bonds, mutual funds and more. 

The money put into this account will be gifted to the beneficiary once they reach adulthood. The age at which an individual reaches adulthood depends on the state. 

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4. 529

A 529 is a common account parents use to save money specifically for educational purposes. A 529 is both state-sponsored and tax-friendly.

All the withdrawals that are made from a 529 must be for educational purposes. If a withdrawal is made from a 529 for a reason other than an educational one, a penalty will have to be paid as well as federal income tax. 

If there is money left over in a 529 account, the leftover money can be rolled over to another child. Beginning in 2024, up to $35,000 of leftover money can be distributed into a Roth IRA, so long as the money in the account has been held for a minimum of 15 years. 

5. Roth IRA

When you are holding your precious newborn baby in your arms, retirement is likely the last thing on your mind. While it probably isn’t necessary to set up a Roth IRA when your child is months old, it is important to start building one early on in their lives.

Helping your child establish a Roth IRA is a great way to get started on retirement savings. A common misconception about Roth IRAs is that you need to have a full-time job with a W-2 in order to open one, but this is false. Teenagers can add money they accrue from side jobs like babysitting or working part-time at a restaurant into a Roth IRA.

The money an individual has for retirement can vary greatly depending on when they started savings. These differences can equal millions of dollars. The earlier you start to save for your retirement, the better off you’ll be in the future.

6. Health savings account (HSA)

Health-related bills can quickly plummet you into debt if you aren’t prepared. A health savings account can help you save for any medical expenses that arise in your family. As long as the withdrawal qualifies as a medical expense, the money you take out is tax-free.