How to Save Money for Kids

*This post has been reviewed by an Illinois Registered CPA. However, when making important financial decisions, it's best to speak with your financial advisor.

Last Updated on May 29, 2022

Best strategies – How to Save Money for Kids

Saving money for kids is not easy, with inflation and prices for things like gas or utility bills constantly rising, and your kids will become adults one day soon. They’ll need money for college or a place to live. How can you prepare for that moment? How to save money for kids’ complex futures? Discover a few solutions, from budgeting to setting up a trust fund and investing.

How to Save Money for Kids by Budgeting

Careful budgeting is key to financial stability and peace of mind. If you are not budgeting, it might be one of the reasons why you can’t save money for yourself and your family. Here are a few budgeting tips.

How to Budget for Your Family?

Start budgeting by following the six steps below:

1. Calculate your monthly income. If you have different sources of income, make an average for the last six months and write down the result.
2. Calculate your expenses. There are different aspects to include in this category. It can comprise utility bills, your mortgage, loans, tuition fees, and monthly subscriptions. Of course, everything you pay for regularly should be on the list.
3. Establish a budget. Set a fixed budget for each spending category. Start with necessities such as groceries and end with wants such as eating out.
4. Set money aside for kids. An essential category will be kids’ savings. Assign money to this category every month. You can keep the money in cash, put it in a savings account, virtual wallet, or whatever you deem necessary.
5. Make sure to write everything down. Having a plan in mind is excellent, but writing it down is even better. With your budget written down, it’s easier to stick to the game plan. It can be hard to remember everything because budgeting involves numbers. Write your budget in a spreadsheet or a budgeting app to help yourself keep track.
6. Start implementing. While drafting a budget, always consult with your accountability partner. Ask for their opinions and ideas. Once you finalize the budget, start spending each month according to it. You’ll see your kid’s college savings fund gradually grow.

The Digital Budgeting Envelope System

There are also different vetted budgeting strategies to help you budget efficiently. The Digital Budgeting Envelope System is one of them. It involves dividing your finances into several categories assigned to different expenses.

First, put money into separate envelopes (literally or using online banking tools), then spend accordingly. Here is an example of how you can budget with a $4,000 monthly income.

Envelope	Purpose	Amount
Envelope no. 1	Mortgage	$1,500
Envelope no. 2	Utility bills	$400
Envelope no. 3	Household expenses	$1,000
Envelope no. 4	Entertainment	$500
Envelope no. 5	Kids’ savings account	$600

This example highlights five envelopes, but feel free to utilize as many or as few as necessary to help yourself be successful with your budgeting.

The 50-30-20 Budgeting Method

The 50-30-20 Budgeting Method is another popular budgeting strategy. It involves dividing your monthly income as follows:

Percent of your budget	Purpose
50%	Necessities
30%	Wants (hobbies, entertainment, etc.)
20%	Savings

Save Money for Kids by using Budgeting Apps

You can also use different budgeting apps to manage your spending better and save money for kids. These apps work similarly:

1. You enter your monthly income and expenses.
2. The tool helps you create a custom budget based on your goals.
3. The tool monitors your spending and helps you stay within your budget.

There are many budgeting apps. Here are three highly-rated examples: Mvelopes, Mint, and YNAB. Download them in the app store or click on the links to learn more.

Create a Trust Fund

A trust fund is one of the most common ways to save money for children. These funds work as an inheritance you pass on to your children. There are different types of assets you can transfer into these funds. For example, you can transfer properties.

There is no limit to how much money or how many assets you can put in these funds. Despite common misconceptions, you don’t have to be rich to create this type of fund.

The purpose of trust funds is to ensure your kids have a source of income if you are no longer around. Trust funds can seem complicated, and there are many things to consider before setting up one. For example, you should pick a reliable trustee. This person will be in charge of the fund. Working with a lawyer to create a trust fund is highly recommended.

Get a Term Life Insurance to Ensure Your Children’s Future

A term life insurance policy can keep your kids safe. If anything happens to you, the insurance carrier will pay out the policy to your family. If you pass away, your kids will have some financial security. This insurance means an extra monthly payment, but this is an investment in your children’s future and your peace of mind.

Save Money for Your Kids by Opening a 529 Plan

Are you looking for ways to save money for your kids while also deducting your contributions? The 529 Plan is a good solution. These plans are tax-advantaged savings accounts for education fees such as tuition, housing, and books.

The state sponsors 529 plans. You may benefit from federal and state tax deductions. These may apply when withdrawing the money. Anyone can open a 529 plan account. There are different benefits to opening a 529, such as:

• The account owner is in charge of the money at all times.
• There’s a lot of flexibility; for example, you can change the beneficiary.
• The beneficiary can be any age. The same person can be the owner and beneficiary.
• There are no income restrictions when setting up the plan, and tax benefits may apply.
• Other people can contribute to the account. There is no annual contribution limit.

If you decide to get a 529 plan, you should do it as early as possible. This way, the account will generate the most significant return on investment for your child when he gets to college. It’s also important to be consistent. You won’t yield effective results otherwise.

Ideally, you would contribute monthly with a fixed amount included in your budget. Research to find the plan with the lowest fees and best returns. Set up automatic payments to make contributing easier. The process is easy and takes just a few minutes. You’ll rest assured that the money goes into the 529 plan every month. If you stick with it, you will see remarkable growth over time.

Save Money for Education with a Custodial Account

Two types of accounts go into this category: The Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). You can create these accounts at different institutions, such as banks, insurance companies, or even mutual funds and non-banking financial institutions.

Custodial accounts resemble 529 plans. They also have a beneficiary, usually a minor. The administrator is the owner or custodian (an adult).

These accounts offer a great deal of flexibility. The custodian decides when and how much money they will contribute. They can also make investment decisions. They’re able to use the funds to purchase different assets. Their choices depend on the conditions set by the institution holding the account. The beneficiaries must be of legal age to access the funds.

UTMAs are the most widespread custodial accounts, with most institutions accepting them. They are compatible with almost any investment asset, even real estate. UGMAs accept the most common assets such as cash, bonds, and stocks. UGMAs intend for minors to access them once they become legal adults.

How to Save Money for Kids by Investing

To many, investing and putting money aside is contradictory, but it shouldn’t be. Investing in the long term can be a great chance to multiply your money. It can help you offer your kid a chance to go to college.

However, it is not the same as spending. You buy an asset that’s bound to provide you with a return when investing. How fast and how much depends on many factors. Two of them are the type of stock you buy and macroeconomic conditions.

There are plenty of different assets you can invest in, such as:

• Stocks
• Bonds
• Certificates of deposit
• Rental units
• Real estate investment trusts

The golden rule of investing is never to invest money you can’t afford to lose. Making more money for your child without actually working for it is enticing, but always remember that all investments carry risks.

Don’t invest all your savings in stock or property that might not yield returns. The best approach is to invest a part of your savings. See how the investment fluctuates. Calculate the return. If you find it profitable, you can always invest more later.

Another way to invest money is by opening a business. What are your interests? Handmade objects, teaching English, gardening, or cooking can bring in additional money as your side hustle. You could offer products or services. You could be a teacher, mentor, or blogger. Find a lucrative passion you can exploit. It can boost your savings account and even give your career an exciting turn.

Start Building Your Kids’ Good Financial Habits

If you think about the long term, you can do more for your kids to help them grow financially responsible by teaching them how to handle their money.

A good starting point is helping them understand a simple budget. That includes three categories: give, spend and save. If they receive money for their birthday or a holiday, encourage them to divide the money into these categories and spend accordingly to practice budgeting.

Also, consider encouraging them to remain debt-free. Finally, if you had issues with debt in the past, fix your credit as fast as possible and talk to your kids about the lessons you learned through those experiences.

The best time to start focusing on financial education? Before kids graduate from high school. Adulthood is waiting at the door. Whether they go to college or take a job, they need to learn financial responsibility.

The basic financial-related lessons young people need to learn are:

1. How budgeting works.
2. How to stick to a budget and live within their means.
3. How to save up and pay for large purchases with cash.

It’s essential to stress the importance of living within your means and not acquiring debt to keep financial stress to a minimum. In addition, keep an open-door policy so that when your kids have questions about managing their money, you can talk them through the situation.

FAQs

How to Save Money for My Children Long Term?

Budgeting is one of the best ways to save money for kids. To be successful, use a solid strategy such as setting up a separate savings account for your kids or a 529 plan.

How Can I Invest Money for My Child’s Future?

There are different ways to invest in your child’s future. You could choose:

• Traditional stocks
• Real Estate Investing
• Bonds
• Certificates of deposit

Why Do Kids Save Money?

Kids save money for different reasons. Some of the most common things are:

• Gifts
• Leisure activities such as sports or music/concerts
• Games
• Clothes
• Going out with friends

What Should You Expect If You’re Successful in Saving Money for Your Kids?

You will be able to cover one of the most significant expenses kids incur as they grow up – tuition fees. Also, you will spare them from getting a burdening student loan. Not having to pay back loans is an invaluable start to their adult life.

How to Save Money for Kids While Paying Mortgage and Bills?

A budgeting strategy for these pesky monthly expenses is the half-payment method. Use it to make sure you have money for recurrent monthly payments. For bills, for example, save 50% of their worth from each paycheck. Then, with two monthly salaries, you’ll have the total amount at the end of the month. The same strategy can apply to your mortgage.