Baby's first savings account

If you’re expecting in 2017 there are probably a million things on your mind and your baby’s financial future most likely isn’t number one.

Even so, it’s good to make some time to think about what sort of savings plan you want to put in place for your baby to help them along when they reach adulthood.

As an investment in Australia’s future Westpac, Australia’s oldest bank, is celebrating 200 years in business by offering a $200 savings bonus for each child born in 2017.

For children whose parent’s apply for the scheme, the bonus will be paid in to a Westpac Savings Account and will remain there accruing interest until the child turns 16.

If you add to the balance over time your child will be able to experience the full power of compounding interest come their 16th birthday.

To see what this could look like you can use a compounding interest calculator to predict how your child’s savings could grow and how your own additions could compliment them.

It’s also worth remembering that even though we are currently in a low interest rate environment, it won’t last forever. Depending on how the official cash rate moves over the 16-year period before the cash is accessible, and how much extra you contribute, your child could end up earning thousands in interest.

Here are some first steps to figuring out how you want to approach your baby’s financial future.

Set up a savings account

Expectant mother sitting on couch with her son using laptop computer at home

It could be the Westpac Bump account or any other savings account of your choice, but having somewhere to stash the money you’re putting away for your baby should be the first step. Having it in a designated savings account also means that it will be earning interest along the way.

Many banks offer special kid’s bank accounts often with some of the highest interest rates on the market, subject to certain conditions. It is worth doing some research into who has the best rates on the market and what you have to do to earn them. This could be depositing a certain amount per month or making limited withdrawals or a combination of both.

Decide what contributions you will make

Germany, Munich, Mother with daughters (4-7) counting stack of coins

Once you have the account set up and ready to go, it’s time to decide what sort of contributions you want to make over the years. Would you prefer to make a regular monthly commitment or deposit lump sums when you come into extra cash? Or, would you rather not make any contributions of your own and instead only deposit gifts given to your child into the account.

This is entirely a personal choice and there are many different ways to approach the matter. Some parents might prefer to institute a pocket money scheme when their child is old enough and deposit some of that cash into the account as a way of instilling an important financial lesson – that money doesn’t come for free. 

Decide what you will do with baby’s gift money

Top view of hands of mother giving one large gift box with blue ribbon to her kid with open hand

Over the coming years your family and friends are going to want to shower your child with cash for the special occasions like birthdays and Christmas. Until your child is old enough to realise what’s going on, the best place for that cash is probably earning interest in their designated savings account.

Once they are old enough to realise what money is (and the potential it has to buy new toys) you might have to rethink this approach. Depending on how you decide to play it, you could work out a percentage of each gift amount that goes towards saving with the remaining part being used to purchase a treat. This is another great way to instil a financial lesson – that you shouldn’t spend everything at once.

Did you find this helpful? Why not share this article?

Advertisement

RateCity

The money talks which you don't need to avoid any more

Subscribe to our newsletter so we can send you awesome offers and discounts

Advertisement

Learn more about savings accounts

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.