Open custodial savings and/or checking accounts for your child in his or her own name at a local bank or credit union. A custodial account is an account for the benefit of a minor with either a parent or another designated adult as cosigner. Savings accounts can be opened for children of any age. Checking accounts can be opened for children as young as 12. Monitor the account(s) online along with your child so that everyone is comfortable banking online and managing bank accounts.
Encourage your child to use the account(s) by depositing allowance money as well as any monetary gifts and earnings your child may have. If your child doesn’t receive an allowance, deposit any money he or she earns or monetary gifts in the account(s). If you open a checking account, get a debit card for your child in addition to a checkbook. That way your child has the option of writing a check or using the debit card when making purchases.If your child overdraws an account or incurs any other fees have him or her pay the penalties.
As your child matures, consider depositing larger sums of money in his or her account(s) with the expectation that he or she will be responsible for spending this money on items you would have purchased in the past. For example, some parents make a single deposit in their children’s savings or checking account every month with the expectation that the money will be used for all discretionary spending for the next month. This might include everything from clothing, to food purchased outside the home, to entertainment expenses, etc. Keep in mind if you do this you must leave ALL relevant spending decisions up to your child even if you think he or she is making bad choices. However, don’t, under any circumstances, give your child money beyond the initial deposit until the next monthly deposit.
Give this a try. You will find that managing finances is a lot like learning to drive. Children need their parents’ patient guidance when preparing for their future independence.
Lisa,
I like your analogy between driving and managing finances. At some point, the kids have to take control, and unless they’ve been given lessons and made a few small mistakes under your tutelage (I remember being stalled at the top of a hill with my mom when I learned a manual transmission for what seemed like hours), they may end up making much bigger mistakes down the road.
I am a firm believer in allowances and I strongly recommend David McCurrach’s Allowance Magic book. Full disclosure – I work with David and sell his book in our store. But the reason I work with him is because I set up my allowance plan per his guidance and 1) it’s a short read and 2) it’s super-simple and easy to implement and 3) it allows for growth, including adding clothes and gift components as your child ages.
Lastly, I would advise parents to look for a credit union or bank account with exaggerated interest. For example, we opened our daughter’s account at a credit union that offers kids 7% interest on deposits up to $500.
-John
Comment by John Lanza — January 11, 2010 @ 1:49 pm