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Key Takeaways
- Simple moves like opening a high-yield savings account can help your kids learn how interest works and form a strong financial foundation.
- Compounding returns make investing particularly powerful for kids, as they have decades of potential growth ahead of them.
- Kids can often take advantage of certain tax benefits that are especially advantageous at their young age, like contributing to a Roth IRA.
Becoming wealthy doesn’t always require working a high-powered job or starting a business that goes public. Instead, when time is on your side, simple strategies around saving and investing can build real wealth. For parents, that can mean making smart financial moves on your kids’ behalf while also helping them develop the money habits that lead to long-term wealth.
Why This Matters
Parents want the best for their kids, but it’s best not to overly stretch your own finances to set your kids up for success. Instead, you can make some simple moves—and teach useful lessons—that will benefit them long term.
Start With a High-Yield Savings Account To Build the Saving Habit
Learning to set money aside and live below your means provides an important financial foundation. No matter how much money your kids make when they become adults, it’s impossible to build wealth if they spend more than they make every month.
One way to get them started on a solid path is by opening a high-yield savings account.
With that, you can teach your child a basic budgeting strategy. Consider using a metaphorical three-bucket method. One “bucket” is for spending, one is for saving, and one is for giving.
Let’s say you put $100 into the account. You could let your kid spend up to $50 on whatever they want, use $20 for gifts to others or a donation to charity, and keep $30 safely in savings. You can decide on a percentage for each bucket that feels right for your family’s values, but in general, this helps your kid learn that not all money is meant to be spent. At the same time, you can help them experience the joy of spending and giving while still having some money leftover.
Also, you can use the account to teach them how interest works. Banks often offer higher rates for kids’ accounts—with today’s best paying as much as 10% APY—so the compounding effects can be even more visible. And if there’s a cap on the balance that can earn higher rates, you can help your kids open a second account when the first gets maxed out.
Important
Minors generally can’t open their own bank accounts, but parents can open a youth account with an adult as a joint account holder, allowing shared access. Note that it’s smart to make your child the primary account holder, instead of yourself, to avoid unnecessary taxes.
Open a Custodial Account To Invest for the Long Term
While building a savings habit helps, you can often create wealth faster through investing.
Consider the following:
- If you put $100 into savings for your child every month from birth until age 18, assuming a generous average APY of 5%, the balance would reach nearly $34,000. Then, if your child let that balance sit for another 12 years until age 30, without even adding anything but earning a more realistic average rate of 3%, the balance would reach around $48,100.
- If you followed the same approach but put the money into stocks, earning an average of 8% per year, the balance would reach roughly $45,000 at age 18. Then, if the balance sat in the investment account until age 30, it would compound to more than $113,000.
A balance like that can be life-changing for a young adult. It could help them easily afford the down payment on a nice home, or it could give them the flexibility to take calculated wealth-building risks, like starting a business.
The Name on the Gains Matters for Taxes
If you open a brokerage account for your child but in your name, any investment gains will be taxed at your rate. Instead, opening a custodial account in your child’s name shifts those gains to your child, who will generally be taxed at a lower rate—and in some cases, not taxed at all.
Once They Earn a Paycheck, a Roth IRA Can Be a Game Changer
To maximize your child’s future wealth, you can also consider opening a custodial Roth IRA for them as soon as they have qualifying earned income, like from working a part-time job. Doing so can provide the benefit of long-term compounding investment returns while potentially avoiding taxes entirely.
Normally, a Roth IRA involves putting in post-tax money while gaining the benefit of being able to withdraw the money, including earnings, tax-free in retirement. But here’s the beneficial catch: Kids often don’t earn enough to have taxable income anyway. With the 2026 standard deduction of $16,100, a child could earn at least that much and pay $0 in taxes.
So, the money put into a Roth IRA often isn’t taxed anyway and can grow for several decades to also be withdrawn tax-free. And while the most profitable move would be to keep the money invested until retirement age, Roth IRA funds can be tapped earlier if it’s for a qualified expense like education or a first home.
What About 529 Plans?
529 plans can be used to invest for the long term, but they have limited use cases. Generally, they’re meant to pay for college or some other qualified education expenses. If the money is used for non-qualified purposes, you can face higher taxes and penalties. So, consider opening a 529 on behalf of your child to fund their higher education while putting excess money into a custodial brokerage account for more flexibility.
Bottom Line
By taking advantage of these opportunities, you can help your child build substantial wealth and potentially avoid some of the financial stress that often comes in adulthood. They’ll still likely have to work and manage their expenses like most other people, so you don’t necessarily have to worry about spoiling them, but a nice head start may leave thin a much better position in the long run.
