Family savings: Teaching your kids the basics

Family savings Teaching your kids the basics

Amy Bradney-George investigates the basic lessons kids should learn about savings accounts.

November 18, 2009

The way that parents save money – especially using a savings account – will leave a lasting impression on their children’s saving habits, and new research from Bankwest shows parents are taking this on board.

The 2009 Raiding the Piggy Bank report shows that 58 percent of Australian parents give out weekly pocket money, and more than half of children regularly save it.

The majority of parents also set conditions for this money, with the most common being performing chores around the house, good behaviour and good school performance.

Bankwest CEO of Retail, Ian Corfield, said this practice helped children learn more about money and savings.

“The vast majority of Australians are trying to teach their kids the value of money by linking it to some type of work while encouraging their kids to save,” Corfield said.

“There’s no question that saving is an important skill and an invaluable lesson our kids need to learn that will continue rewarding them throughout their lives.”

Once kids start earning money they can also learn about how banking can help them save even more.

Kids Savings Accounts
It’s just as important to find the right account for your child as it is for yourself. With so many children’s savings accounts around, comparing rates and features can become part of the learning process.

Interest in these accounts can be as little as 0.01 percent p.a. or as high as 6 percent p.a. and are often influenced by factors including the balance, regular deposits and low or no withdrawals.

The frequency of the interest payments also influences how much can be earned, and is usually calculated annually or monthly.

By looking at the base interest rate you can show your children how to estimate the amount of interest they will earn to begin with.

If the account had been opened with a $50 deposit and had a base rate of 1 percent calculated monthly, your child would earn $0.04 cents in the first month.

If that $50 stayed in the account for a year it would earn $0.50, indicating that the longer money is in an account, the more interest it will earn.

This savings lesson is also the basis for kids’ accounts that have a higher interest rate for no withdrawals or regular deposits, the latter showing that by increasing the amount of savings more interest can be earned.

These types of accounts tend to base their rewards system on savings skills to encourage kids to learn, and are a great tool for practical savings lessons.

Finding the right account and actively teaching kids about money will help them develop an understanding of savings they can use throughout their life.

 

 

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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.

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.

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.

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 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

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.

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 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.

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.

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.

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 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.