Are there special savings accounts for children?

Many lenders offer savings accounts that are specially designed for children.

Typical features of children’s savings accounts include:

  • Relatively high interest rates
  • No ongoing fees
  • Free deposits

Of course, interest rates and fees vary from lender to lender, so it pays to shop around.

Pros of children’s savings accounts

Children’s savings accounts are a great device for teaching good habits at an early age.

One lesson that children’s savings accounts teach is the importance of delayed gratification. Children learn that if they have the discipline to invest – rather than spend – whatever they earn from pocket money and part-time jobs, they will be rewarded with ‘free money’, or interest. This is a valuable life lesson.

Children’s savings accounts also teach important lessons about the financial system – how to invest money, what happens to that money and why a company would want access to that money.

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Cons of children’s savings accounts

Children’s savings accounts often allow free withdrawals – but with a catch.

Some accounts pay very low levels of ‘regular’ interest, combined with relatively high levels of ‘bonus’ interest if no withdrawals are made in a given month.

So even though withdrawals might be free in theory, they can turn out to be very expensive in practice.

Again, rules vary from lender to lender, so shop around.

Tax rules for children’s savings accounts

The Australian Taxation Office has created strict rules around children’s savings accounts to stop parents parking their money there for tax purposes.

According to the rules:

1. Children who earn less than $120 per year from savings accounts won’t have any tax withheld.

2. Children who are under 16 years and who earn less than $420 per year from savings accounts won’t have any tax withheld – as long as they provide either their date of birth or tax file number. Otherwise, the lender will withhold pay-as-you-go tax at a rate of 49 per cent, and they will need to lodge a tax return to claim a refund.

3. Children who are under 16 years and who earn $420 or more per year from savings accounts won’t have any tax withheld – as long as they provide a tax file number. Otherwise, the lender will withhold pay-as-you-go tax at a rate of 49 per cent, and they will need to lodge a tax return to claim a refund.

4. Children who are 16 or 17 years won’t have any tax withheld if they provide a tax file number. Otherwise, the lender will withhold pay-as-you-go tax at a rate of 49 per cent, and they will need to lodge a tax return to claim a refund.

Children are considered to be under 16 years until the end of the calendar year in which they turn 16.

Click here to get more detail about the tax rules for children’s savings accounts.

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Learn more about savings accounts

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.

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

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. 

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.

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.

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.

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.

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.

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.

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 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 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 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.