Teach Kids that a Savings Account is a Waste of Money!

Reimagining Savings for a New Era

Saving money is one of the most important habits children can learn. How they learn to save matters! Goes are the days where we can place our money in a saving account and watch it draw a few cents every month. Traditional savings accounts, while secure and offer complete safety from losses, they often yield minimal returns, leaving young savers uninspired by their stagnant balances. Savings accounts have long been a go-to option for teaching kids about money. However, even the best high-yield savings accounts offer interest rates of around 4%, which struggle to outpace inflation. For example, if inflation is 3%, the real growth of your child’s money in a savings account is a mere 1%. Over time, this limited growth can hinder their financial goals and discourage excitement about saving.

In an era where traditional savings accounts offer nothing more than a place for banks to capitalize on using your money, many parents should start discovering a powerful alternative to help their kids build wealth instead of the banks. A custodial account is a financial tool that allows parents and their child to invest on behalf of the child. With a custodial account, parents are able to invest in assets like stocks, ETFs, and mutual funds. Investing in ETFs like VTI (Vanguard Total Stock Market ETF) or VOO (Vanguard S&P 500 ETF) are the modern version of the saving account. The ETF provides exposure to a broad range of companies such as Apple, Amazon, and Facebook. Imagine telling your children they own a piece of these companies. They gain a sense of pride through ownership, higher growth potential than savings accounts, and they learn that investing is best when it is in something they know. Since these ETFs typically offers higher long-term returns than savings accounts, your child gets a front-row seat to financial growth, making the concept of saving far more rewarding. Over time, they’ll see how their contributions grow through compounding and market performance, instilling a deeper appreciation for disciplined saving and investing.

The Power of Compounding in Action

Let’s illustrate the difference:

This year, I placed $1,000 into both a high-yield savings account with an interest rate of 4% and a custodial account invested in VTI (an ETF that tracks the stock market), adding $50 to each account monthly. Here’s what happened:

• The high-yield savings account grew to $1,541.40 by today (November 17, 2024), thanks to consistent contributions and compounding interest.
• The custodial account invested in VTI grew to $1,620.94 during the same period, reflecting a 12% annual return based on this year’s performance.
• The difference? Nearly $80 more in the custodial account due to the market’s higher returns, demonstrating how investing can significantly enhance your child’s savings.

The results speak for themselves. While the savings account provides a safety net, the custodial account builds a ladder to long-term wealth. By embracing this modern approach to saving, you can help your child start the process that leads a brighter financial future with the right knowledge. ​

The next time you consider where to place your child’s earned money, think beyond the bank. VTI and VOO aren’t just investments, these are modern savings tools that align with today’s financial realities. By introducing your child to these options early, you’re not only setting them up for financial success but also instilling a mindset of growth, strategic planning, and smart disciplined contributions.

Why ETFs Are Perfect for Children

1. Growth Potential: A $1,000 investment in VTI or VOO today could grow significantly by the time your child is an adult, especially with consistent contributions.
2. Hands-On Learning: Watching their money grow in real-time teaches kids the basics of investing and reinforces the importance of long-term thinking.
3. A Modern “Savings Account”: Instead of settling for 4% annual returns, kids can benefit from the historical performance of the stock market, making their savings work harder.

How to Set Up and Use a Custodial Account

1. Open the Account: Most brokerage platforms, like Vanguard, Fidelity, or Charles Schwab, allow you to open custodial accounts easily in your child’s name. These accounts are managed by you until your child reaches the age of majority (18 or 21, depending on the state).
2. Invest in ETFs: Start with a diversified ETF like VTI or VOO. The broad exposure makes it a solid choice for steady growth with manageable risk.
3. Teach Regular Contributions: Help your child allocate a portion of their earnings or allowance to the account each month. Show them how even small contributions add up over time. Start with a lump sum that you put there, such as $500 or $1,000, and contribute monthly, even if it’s just $20 or $50.
4. Explain Credit and Compound Interest: Use the account’s growth as a teaching tool. Show them statements, explain the value of reinvesting dividends, and compare their investment returns to a traditional savings account.
5. Celebrate Milestones: When the account grows by a significant amount, find a way to celebrate with your child to reinforce the positive impact of their saving habits.