4 Key Financial Accounts for Kids

Achieving financial wellness takes time and practice. And if you have children, you’d want to put them on the right path as early as possible.

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If you have children, you’re probably financially responsible for them in full or in part, but someday they’ll have to step into the real world and manage finances on their own. This could be a daunting task, especially since they can’t open accounts like their own credit cards until they turn 18.

But with your help, they can access various financial accounts. These could help them with tasks like budgeting, saving, investing and even preparing for college. So let’s take a closer look.

Joint Checking Account

Your child may have some form of income coming from a part-time job, allowance, or a combination of these. But rather than just stuffing their money in envelopes, they should keep it somewhere safe like a checking account insured by the Federal Deposit Insurance Corp. (FDIC).

If your child is under 18, you could open a joint checking account. This would provide both you and your child access to the account. However, it’s recommended you let your child take full control of the account so they can track their own spending and work out their own budgets.

But don’t just stop by the nearest bank to open an account. It pays to shop around and find the option that most closely meets your needs. The best checking accounts have no maintenance fees or minimum balance requirements. Some even earn interest.

But you also should look for other features like parental controls. These include spending restrictions that prohibit your child from withdrawing money or completing a transaction beyond a certain limit. This could help instill some discipline in them and also allow them to stay within their budgets.

Joint Savings Account

Developing a good savings habit should begin as early as possible. But if your child is under 18, you’d need to open a joint savings account.

But here, too, it helps to shop around. Not all savings accounts are created equal, especially when it comes to interest or annual percentage yield (APY).

The average APY on savings accounts is 0.39 percent, according to FDIC data. But you can find high-yield savings accounts from online banks that pay APYs closer to 5 percent or even 10 percent on large balances.

A savings account with a high APY can help your child see the benefits of compound interest over time at a very young age.

In addition, you may also want to look into money market accounts. These are savings options that often have higher APYs than traditional savings accounts. And many are linked to debit cards, which provide easy access to your savings in case of an emergency. But with these, you may want to consider how disciplined your child is. Savings are meant to be used for necessities and emergencies.

Having easy access to these savings via a debit card, may entice kids and teens to splurge their emergency funds.

Custodial Brokerage Accounts

One of the best ways to build and maintain wealth is to consistently invest in securities like stocks and bonds for a prolonged period of time.

And you can start investing in your child’s future as soon as they are born by opening a custodial brokerage account in their name.

You would manage the custodial brokerage account on your own. But once your child reaches the age of majority (18 or 21, depending on the state), your child takes full control of the account.

You can open a custodial brokerage account through various banks and investment firms. But be sure to examine your options. The best custodial brokerage account providers charge little to no fees and offer a diverse menu of investment options as well as interactive financial literacy tools and content.

But if you’re not too familiar with investing yourself, you can consider opening a custodial brokerage account through a robo-advisor.

Here’s how it works. You answer a questionnaire about your finances and investment goals. A digital platform then uses the answers to that questionnaire to recommend a diversified portfolio. The robo-advisor automatically manages this portfolio on your behalf. So there’s no need to individually evaluate and pick securities like stocks, exchange-traded funds (ETFs), and mutual funds. In some cases, the robo-advisor rebalances your portfolio based on factors like market conditions.

If you’re interested, there are two types of custodial brokerage accounts. And they primarily differ in investment options.

Uniform Transfers to Minors Act (UTMA) accounts allow you to invest in virtually any security, from stocks to alternative investments.

And the Uniform Gifts to Minors Act (UGMA) account limits investment options to traditional assets like cash, stocks, and mutual funds.

But keep in mind that UTMA accounts may not be available in all 50 states.

529 Plans

The costs of a college education continue to skyrocket. But you can start investing in your child’s higher education as soon as they are born by opening a 529 college savings plan in their name.

These offer distinct tax benefits. The earnings on your contributions grow tax-free. And withdrawals are also tax-free as long as you use the funds on qualified educational expenses like tuition, books, and supplies required for enrollment. And some states provide state-level tax deductions or credits based on your contributions.

A 529 plan allows you to invest in a variety of mutual funds or age-based portfolios. These are professionally managed portfolios that initially invest in growth-oriented securities like stocks when your child is young. Over time, the portfolio’s asset allocation or investment mix becomes more conservative in order to preserve savings that have accumulated.

Nearly every state sponsors a 529 college savings plan. And you can open an account in any state. Your child doesn’t even have to attend college in that state to use the account’s funds and benefits.

But as you examine different 529 plans, be sure to pay close attention to factors like investment options and contribution limits.

The Bottom Line

Achieving financial wellness takes time and practice. And if you have children, you’d want to put them on the right path as early as possible. You can do so by helping them open various financial accounts like a joint checking and savings account, a custodial brokerage account, and a 529 college savings plan.

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