How a high-yield savings account can help your children
Every parent wants to set up their kids for success, whether it's teaching them life skills or basic values. One area where many parents forget to prepare their children, though, is their finances. Part of this is teaching your kids important concepts, like saving and investing smartly, but you can also give your kids a jump start to financial success by putting away money in savings for them from an early age.
There are many options to save for your kids, but one that parents may want to consider is a high-yield savings account, in which you can periodically deposit money into it. A high-yield savings account works like the traditional savings accounts you may remember from your own youth, but this type of account offers much bigger interest returns. The best rates often come from online-only financial institutions, where the lack of physical overhead allows for higher rates than traditional banks.
High-yield savings accounts offer many benefits that will give your child a leg up when they enter adult life, so opening one now can be a smart move if you want to prepare your kids for later in life.
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How a high-yield savings account can help your children
Here's why a high-yield savings account is a good choice for saving for your kids' future.
The interest rate is solid
Now is actually an especially good time to open a high-yield savings account. Rates are very high right now as a result of repeated hikes to the federal funds rate by the Federal Reserve, which has led to an increase in consumer interest rates. These rates won't last forever, but getting your money into a high-yield savings account right away lets you start earning interest and building your child's nest egg.
Even if the rate on the account does eventually go down, it will still generally be higher than the rate you're offered with a traditional savings account — and certainly higher than the typical checking account, where the money \would simply sit and not earn anything.
Open a high-yield savings account for your kids online today.
The money is safe
When planning for your child's future, safer is typically better. You could potentially earn more money by investing the funds via a brokerage account or other investment platform, but that comes with a significant risk of loss. You don't want to risk a huge market downturn in your child's teenage years resulting in them turning 18 and having an account wiped out by losses.
You won't lose money in a high-yield savings account. Even if the bank you use collapses, high-yield savings accounts are protected by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. If you're lucky enough to be saving more money than that, you can even open a second high-yield savings account at another bank and get the same protection on that account.
The usage is flexible
Many parents opt to save for their children through a 529 college savings plan. This is a great option, and it may well be worth it to use a 529 in addition to a high-yield savings account. There is just one problem, though – not all kids want or need to go to college. Perhaps your child will be a standout actor who moves to Hollywood to pursue a career on the silver screen.
With a high-yield savings account, they could support themselves while chasing their dreams. Keeping the money in a high-yield savings account also gives your kids flexibility for any accidents or emergencies that come up. Again, saving with a 529 is not a bad idea, but using a high-yield savings account in conjunction with it provides more options.
It earns compound interest
When you save with a high-yield savings account, you aren't just earning interest on the money you deposit; you're also earning interest on your interest. This is why it is so important to start saving as soon as possible, even if you can't put that much aside each month.
To show why this compounding interest is so important, let's look at two different scenarios. For the purpose of this example, we will use a constant interest rate of 4.5% and annual compounding. It's important to note, though, that interest rates on these accounts are variable.
Saver A starts saving for their child when they turn 10, putting aside $200 a month. By the time your child turns 18, they'd have an account balance of $22,973 from $19,200 in principal.
Saver B starts saving for their child as soon as they are born but only puts aside $75 a month. This saver has a total account value of $24,664 from $16,200 in principal. Despite depositing less money into the account, Saver B has more to give their child as they enter the adult world.
The bottom line
Saving for your kids now can set them up for the future. A high-yield savings account is an ideal tool for this goal. These accounts pay high interest, are secure and offer flexibility when your child reaches adulthood. By starting when your kids are young, you can leverage compound interest to create wealth that will allow your children to hit the ground running as they move into adulthood.
