When I was pregnant with my three-year-old son Mason, a family friend (who happens to be a banker) gifted us with a baby carrier and a piggy bank.
The carrier we had registered for, but the bank was a delightful bonus. We started putting in pennies, nickels, and dimes every evening. When it became full, we used the coins to start a little savings account for Mason — with a whopping $22.
To be honest, we didn't think too hard about the whole thing. The piggy bank looked cute on his dresser, and it was an easy way for us to get rid of loose change that wasn't accepted at the laundromat. Besides, once it was full, it was a no-brainer to take it to the bank.
We figured we were taking a small step toward teaching our son the value of saving his money — an especially important lesson for a kid living in flashy, overpriced New York City.
We've continued to fill that piggy bank with our spare change, plus birthday and holiday gifts, and deposit the money whenever it's full. Ultimately, we plan to let Mason take "ownership" of it once he's in first grade, when he'll learn about counting money and identifying the different types of coins. We want to show him that by saving his nickels and dimes he can accumulate a significant amount of money over the years (and, hopefully, how worthwhile it is to save instead of spend!).
Apparently, we're on the right track. New research reveals that not only does a simple savings account make kids more financially aware, having one means they're more likely to accrue assets, go to college, and invest in the stock market. Here's why.
How research supports saving
"Even a small savings account can change the way that children think about their future and going to college," says William Elliott III, associate professor of social welfare at the University of Kansas in Lawrence, who has done extensive research on the way in which child savings accounts (CSAs) can help reduce debt. "You're creating this savings mentality, so children are becoming more financially aware. "
For children in low- to middle-income families, having even a little money in the bank designated for education may help them — and their parents — realize that college is an attainable goal, says Elliott. "Some experimental data has proved that savings change the way children think about their future," he explains. "Having an account, having a structure in place, can have a positive affect not only on the children's expectations but on the parents' expectations."
In fact, 2011 research from the Center for Social Development at Washington University in St. Louis suggests that college savings accounts containing as little as $1 result in students being up to seven times more likely to attend college.
And not just attend college, but graduate. Having some type of savings to help out with tuition costs makes children in low to middle-income families four times more likely to complete college. Why? According to Elliott's research, students without savings are more likely to drop out over concerns about accumulating debt.
Regardless of family income, children who have early access to savings accounts accumulate more assets — an average of $2,000 compared to $100 for those who did not have a savings account as a child–and are four times more likely to invest in stocks as adults, according to additional research conducted at the University of Kansas.
Why savings accounts are catching on
The data is so compelling, in fact, that larger initiatives are being set up to promote savings accounts for kids.
In San Francisco, for example, every kindergartener receives his or her own college savings account with an initial deposit of $50; Cuyahoga County in Cleveland, Ohio, offers a similar program in which every kindergartener is gifted $100. The Harold Alfond College Challenge in Maine awards children an initial grant of $500. This year, the state of Nevada launched a program in which it opens a college savings account with $50 for kindergarteners in 13 rural counties. All in all, Dr. Elliott says, there are about 16 American cities and states that have started some form of account for their children.
At the national level, different forms of legislation suggesting ways to subsidize a child's savings from birth keep bubbling to the surface, including the 401Kids Family Savings Act of 2006, the Savings Competitiveness Act of 2006 and the ASPIRE Act of 2010. All propose options for increasing the savings rate among young people, from establishing Roth IRAs for minors to developing programs to increase financial literacy among young account-holders. None are being actively discussed at the moment, and it's unlikely any of these bills will pass.
Other countries, though, have acted on the demonstrated benefits of children's savings accounts: The United Kingdom, for example, started its Child Trust Fund in 2005, which established long-term savings accounts started by cash deposits from the government to hold up to about $2,400 tax-deferred annual contributions from family and friends. Their government has since changed the program to what is called a Junior ISA: A long-term savings account that can hold cash, stocks, and shares, or both, with tax benefits.
Ready to open an account for your child?
If you don't live in a city or state that offers a savings program, it's easy enough to open an account for your child. Start by researching options at a bank you trust. Remember that in a savings account, unlike in a checking account, your child will earn interest on the money he deposits.
If you're putting this money away specifically for college, you may want to consider a 529 account, a state-sponsored savings account which carries tax incentives to encourage families to save.
Be sure to check all the terms; there may be a minimum balance required to keep the account open, particularly if you'd like online banking. In the case of a 529, they're state-sponsored, but you don't have to open one in your home state. Be sure to take a look at different state's investment options, as well as whether your home state offers tax breaks if you do open an account through their plan. For more ins and outs of 529 plans, read about nine mistakes not to make.
For more guidance opening a savings account, use our free checklist. After all — many good things can start with a piggy bank.
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