Whether starting their college fund early or planning the ultimate Disney vacation, saving for your kids can help ensure they’re prepared. And while savings and CD rates are high, now is a good time to set aside some extra cash for your kids to earn interest on their savings.
Although you can earn a high return on savings right now, the primary purpose of a savings account is to have a separate place to park your funds for short- or long-term goals. So, even when rates drop, parents and kids alike can still benefit from the right savings vehicle -- whether it’s a savings account, CD, I bond or 529 College Saver Plan. And in the meantime, you can earn as high as 4.00% to 5.00% APY right now with some savings accounts, which can add extra cash to money you’re already saving.
Here’s a closer look at this week’s rates for high-yield savings accounts and certificates of deposit. And we’ll share what saving options experts recommend based on your time horizon and goals for your kids.
High-yield savings rates remain stagnant for another week
None of the banks we track at CNET decreased their savings account rates this week -- most kept their savings rates the same. But we saw a few swing upward. Quontic moved its 4.05% APY up to 4.25% APY, and CIT’s high-yield savings account jumped from 4.75% to 4.85% APY. Here’s a closer look:
|My Banking Direct||4.76%|
CD rates didn’t change much, either
As many experts predicted, some CD rates are seeing small increases after the latest Fed rate hike. The banks we track at CNET saw average APY increases this week, and some only for select terms. Here’s a snapshot of what happened:
- Ally’s six-month CD is up from 3.40% to 3.50%.
- Bask Bank pushed its one-year CD up from 4.70% to 5.00% and its 18-month CD from 4.00% to 4.50%.
- CFG Bank also slightly increased its one-year and 18-month CDs from 5.17% to 5.25% each.
- It’s also worth noting that MYSB Direct was the only bank to increase its five-year CD rate from 4.40% to 4.52% this week.
Comparing CNET’s average CD rates
Are CDs and savings accounts the best place to grow kids’ savings?
Regardless of whether rates continue to rise or start to trend downward, savings accounts and certificates of deposit are a great place for storing funds for your child.
“If you’re looking for simplicity, a high-yield savings account is a great choice,” said Ryan Furlong, senior financial planner at Facet. “High-yield savings accounts are low maintenance, and the funds in your account can be accessed at any time.” It’s a good option right now for most people since you can earn around 4.00% on your funds, and most don’t require a minimum balance or deposit, he added.
But if you want to earn a fixed rate on savings you already have put aside, a CD might be a better option. Many CDs right now offer better interest rates in exchange for locking your funds up for a certain period of time. If your goal is a few years down the road, a CD can serve as a secure place to stash your funds, while earning a predictable return.
For long-term saving, you may take a more diversified approach, such as stocks or mutual funds. “This is a particularly advantageous route when you have 10 or more years for the money to grow,” said Furlong. Because though you may earn a better return, there’s more risk -- including losing your principal and making sure your earnings outpace inflation. “Bumps in the road are part of investing and the short-term ups and downs of the market are irrelevant when considering your long-term goal,” said Furlong.
One easy way to get started is by thinking about money for kids in three different buckets: saving for today, tomorrow and the distant future, said Furlong.
Savings for now: Whether the money is to cut the cost of daycare or a vacation, your best option is a high-yield savings account, because it’s accessible whenever you need it. You can regularly add money from birthdays and holidays. And you can withdraw the money when you need it. It’s also a good way to make regular contributions toward a goal.
You may also consider a money market account. “They typically pay a higher interest rate than a savings account but tend to have a limited number of monthly withdrawals,” said Buhrmann.
Money you’ll need in three to five years: Consider a money market account, CD or treasury bond that usually earns more than a high-yield savings account. A money market account is generally the most accessible option, but may have a lower rate than the other two savings vehicles. Remember that with a CD you’ll pay a withdrawal penalty if you need the money before the term is up -- and if you do, you may lose interest. Treasury bills like I bonds and treasury money market funds are more flexible than CDs and offer a higher yield, said Furlong. However, you cannot contribute more to bonds and CDs. You’ll need to have your one-time deposit ready before opening the account.
Funds for the long term: If you don’t need the money for the foreseeable future, or you’re unsure what you’ll need it for, consider investing in a 529 or other stock market investment account. While these accounts are more volatile and have taken a tumble in recent years while inflation remains high, the stock market is the best chance to outpace inflation and grow your child’s wallet. “Trust in your plan and keep on saving -- even if it feels challenging on down market days,” said Furlong.
If you keep your short-term savings in a liquid or flexible savings account and diversify your funds for the long term, you’ll be prepared for the short term while giving your investments time to grow without touching the funds, Furlong added.
Tips for saving for kids
Saving for your kids can be tough if you’re juggling financial goals -- such as knocking down credit card debt or building an emergency fund -- all while paying higher prices on everyday necessities. And that’s OK.
“It’s OK in this time of high inflation and higher interest rates if you can’t put money aside on behalf of your children,” said Joe Buhrmann, senior financial planning consultant at eMoney Advisor. “Don’t lose sight that some of what you can impart can’t be measured in dollars, cents and account balances.”
When it boils down to where to allocate funds, he advises ensuring your house is in good order before assisting your children’s savings. “As a parent, I had to walk that line of balancing our needs with the wealth I wanted to help jumpstart their adult life,” Buhrmann added.
And even though there’s no set strategy for saving for your kids, the right tips can help simplify setting aside money over the years when you’re ready. “Don’t fret over the perfect savings vehicle,” said Furlong. Instead, it’s more important to focus on what you can start on now, to get in the habit of setting aside money for your child.
When you’re ready to set aside money for your kid, think about the goal first, said Buhrmann. “You need to have a clear picture of what you are saving for, such as college planning, building up wealth for your kids, saving for a down payment on their first car, or teaching them about money and the importance of saving and deferred gratification.”
Whether you’re taking advantage of high savings rates today or putting a plan together for the future, here are some other tips to help you save money for your child.
Put savings on autopilot: Use technology and automation to your benefit, said Buhrmann. You can have funds automatically swept from a bank account into a longer-term savings account to earn interest and avoid spending it.
Consider cash as gifts: You may ask friends and families to help grow your child’s savings as a birthday or holiday present, instead of toys or clothes. If you’re putting money in a 529 education account, there’s a shareable link to make contributions directly. “Small deposits into these types of accounts can add up quickly,” said Furlong. “People love being able to contribute to children’s future financial wellness.”
Lead by example: Talk to your kids about saving and don’t hesitate to show them how you’re putting money away for a goal -- for emergencies or a big purchase you plan to make for yourself later this year. Even if you cannot actively save much for your kids, they can still learn about savings by watching you chase your financial goals. You may walk your kids through your credit card or bank statement to get started.
“I encourage parents to take the opportunity when presented to offer teachable moments where you can teach your children how to be good savers [and] spenders,” said Buhrmann. Even though saving for your kid can help loosen the strain on your wallet in the long run, try to teach your child money management -- such as comparison-shopping or how long it takes to pay off a credit card with only minimum payments.
As a parent, you can open a savings account for your child at any age. Some parents do so as soon as their child is born. It’s best to look for a custodial account that you can manage until the child turns 18 and can access it themselves. Otherwise, some banks offer special savings accounts for children with full parental access and permissions. The age will vary by bank.
It depends on your goal and how soon you’ll need the money. If you need the money to cover expenses soon or make regular withdrawals and deposits, you may choose a high-yield savings account to stash some of your kid’s cash. Otherwise, you may consider a CD to earn a better return in exchange for agreeing to a longer term. Or you may choose to have both, depending on your different goals.
If the interest or dividends earned is more than $2,300, it may be taxable as unearned income for the child, according to the IRS. However, if it’s less than $11,500, you may be able to include that income on your tax return instead of filing a separate return for your child. There are different forms depending on your situation, so it’s best to consult with a tax professional to be safe.