It’s never too early to start a savings account for your child. In fact some parents even set one up as soon as their child is born.
Thanks to the marvels of compounding interest, the earlier you set up the account, the more quickly your child’s wealth will start to build. This is especially true if you (or the doting grandparents) are able to deposit a lump sum to get the account off to a strong start.
Many of us will remember from our youth the old NZ Post Office Squirrel Savings Accounts, where you could deposit money at school each week into your bank book and start earning interest from a tender age. Unfortunately, kids’ savings accounts disappeared from the banking scene for many years, but are now making a comeback as banks recognise their value in turning children into lifelong customers.
Most of the major banks now offer kids savings accounts up to the age of 18, when they usually transfer into mainstream, adult accounts. The beauty of kids’ bank accounts is that they pay a reasonable interest rate, and attract no transaction fees, monthly account fees, or any other finance fees.
For our three children we have recently set up kids bank accounts in each of their names, which is providing huge motivation for the kids to learn the benefits of interest, especially compound interest. There are no “bank books” like the old days, but they do receive a monthly statement which gets them all excited. They each started with $100, and have already accumulated an extra $3.99 per account, which they think is nothing short of miraculous!
To set up a kids’ bank account make sure that you take all the requisite paperwork; you will need their birth certificate or passport, and their IRD number…yes, you read that correctly! Your child (even if a mere babe) needs to have their very own number for tax purposes. If you set up the bank account without registering them, then all interest accrued will have 39% Withholding Tax deducted by the IRD; compared to 19.5% if they are registered.
Children’s savings accounts are excellent if you want to teach your child the saving habit and will only be depositing small or sporadic amounts. However, if you intend to deposit a large lump sum or significant regular amounts to set up your child financially for the future, then it would be wiser to consider an account that pays a higher interest rate. We will look at these options in a later article.