Whether you’re a brand-new grandparent or your grandkids are getting into their teenage years, opening a savings account for a grandchild is a practical (not to mention generous) way to help them get a head start on their financial journey. You may be wondering what the best way to save money for a grandchild is, so that you can give them a leg up on college tuition, a down payment on their first home, or contribute to other expenses in their future. Opening a savings account for your grandchild is a great place to start.
So, what should you consider before opening a savings account for a grandchild? Here are the main things to keep in mind as you think about saving for your grandchild’s future.
Benefits of opening a savings account for a grandchild
Opening a savings account for a grandchild can have many advantages, says Chanelle Bessette, a personal finance writer. “The savings you gift them can go toward college, wedding expenses, starting a business, or another major purchase,” she says. “It can also help them avoid taking on debt that would otherwise hold them back as they move through life.”
Bessette breaks down the three benefits of opening a savings account for a grandchild:
1. Your grandchild can learn about managing their money
Even if the money isn’t used for a big life event, one major benefit of a savings account for a grandchild is that it can teach them financial responsibility, Bessette says. As the grandchild gets older, you or their parents can use the savings account as a tool to help them learn how to make smart financial decisions.
For example, Bessette gives the example that your grandchild might want to attend both swim camp and cheerleading camp. Rather than simply footing the bill without question, you could encourage them to research the cost of summer camps in the area, investigate scholarship opportunities, and even get a summer job to cover a certain amount of the cost if needed. Having access to some money of their own can help young people learn a variety of important lessons about money, while benefiting from the guidance of an adult, Bessette adds.
2. Savings accounts for grandchildren offer flexibility
Another benefit of opening a savings account for a grandchild is the flexibility a savings account affords. You have the freedom to choose how much and when to contribute to the account. While Bessette recommends having a deposit schedule in mind and communicating it to your grandchild’s parents (more on that below), you are free to adjust your plan as things change. “Maybe you want to add more, or maybe you need to pull back—savings accounts for grandchildren allow you that flexibility,” Bessette says.
3. With a savings account, your grandchild’s savings can grow, thanks to compound interest
Savings accounts for grandchildren can grow over time thanks to compound interest. Especially if you’re saving over a long period—for example, from a child’s first birthday to their 18th—the money has a good chance to grow. With compound interest, you earn interest on both your principal—in other words, your bank balance—and any interest you receive. As a result, your savings can really add up, especially if you have a significant amount of money in the account.
Now that you have a grasp of the benefits of savings accounts for grandchildren, it’s time to ask yourself a few questions before opening one.
Questions to ask before opening a savings account for a grandchild
As you determine the best way to save money for a grandchild, Bessette says there are some key questions to consider:
1. Who will be the account custodian?
Before you open a savings account for your grandchild, you’ll need to determine who the custodian will be. Specific rules can vary depending on the bank. With a Discover® Online Savings Account for a grandchild, only one custodian can be designated. Custodians have the authority to:
- Open account(s)
- Receive account information
- Conduct transactions
- Name or change successor custodians
- Manage the account via the account center
- Close account(s)
Bessette says that everyone’s situation is unique. If your relationship with the grandchild’s parents is strong, you might consider making one of them the custodian. “You don’t have to necessarily be an owner on it as a grandparent,” Bessette points out. “You could just have the account information and funnel some money into it whenever the mood strikes.” However, many grandparents opt to make themselves the custodian and designate a successor custodian to the account. Ultimately, the choice is yours.
2. How often will you fund the account?
Online savings accounts are flexible, but Bessette recommends having a conversation with your grandchild’s parents to set expectations before opening the account. You might choose to add to your savings account for a grandchild on their birthday or holidays. Or, if you have a stream of income, you might contribute a portion of each paycheck. Think about whether you’re able to contribute monthly, annually, or on an irregular basis, and communicate your plan before you get the ball rolling.
3. How do you want the money used?
You should also consider if you have any specific goals for the money, Bessette recommends. For instance, you might determine that the savings account for your grandchild should only be used to pay for their college tuition. Or you could leave it more open-ended and have conversations with your grandchild as they get older about how they’d like to use the funds. Again, communication is key so that everyone is on the same page from day one, Bessette says.
Types of savings accounts for grandchildren
You’re probably wondering, how can I open a savings account for my grandchild? There are several options as you consider the best way to save money for a grandchild:
Online savings account
An online savings account can be an excellent place to stash some cash for your grandchild’s future—even if you already have a savings account of your own. After all, having multiple savings accounts is a way to build wealth and reach financial goals. Online savings accounts are easy to open, and it’s simple to log in and review your account information and transfer money between accounts.
“You could set up your own savings account that’s earmarked to give to your grandchildren at some point,” Bessette says. “Then once you hit that point, you could work with their parents to set up a joint account between them and their child so they can make sure the money is doled out appropriately.”
Children’s savings account
Some banks offer savings and checking accounts for children. Kids’ savings accounts must be opened by a parent or guardian who will be a joint owner. These accounts typically have more restrictions than an adult bank account. But, like a regular savings account, children’s savings accounts allow you to earn interest on the money.
Custodial savings account
Custodial savings accounts allow an adult to open an account for a child and manage it until the child reaches the age of majority. If you open a Discover custodial account, for example, the child will not have any access to the account, or to information about it, until they reach 21 years old. (Of course, you can share information about the account with them before that time if you like.) Custodians have full control over the account until that time, when coming-of-age documentation is sent to the grandchild and account ownership is converted to them.
No matter which type of account you choose, look for one that offers a good interest rate. “Try to get the greatest return, especially since you’ll probably be saving for a very long period of time,” Bessette advises.
How to open a savings account for your grandchild
The process of opening a savings account will vary slightly based on your bank and the type of account you open. But in general, these are the steps you’ll need to take to open a savings account for a grandchild:
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1. Fill out the application
The application may ask for personal identifying and contact information, including your name, date of birth, address, phone number, email address, and tax identification number (TIN). If you’re opening a Discover custodial account, you’ll also need your grandchild’s TIN, since they will be the account owner.
2. Choose your account type
When opening a savings account for a grandchild, you may have the option of an individual account or a joint account. If you choose a joint account—to share with the child’s parent, for example—you’ll need to enter the personal information of each account holder. (Remember: With a Discover custodial account, the minor does not have access to the account until they turn 21 years old.)
3. Fund the account
If the savings account has a minimum deposit requirement, you’ll need to deposit at least that much money by initiating a bank transfer, sending or depositing a check, or using a wire transfer.
You can open a savings account for a grandchild today
Opening a savings account for a grandchild is a generous, forward-thinking thing to do. “If you can afford it, it’s a great way to set up your grandchild for success,” Bessette says. Financial planning for a baby isn’t easy or cheap. Savings accounts for grandchildren can help support the next generation, as well as their parents, while also teaching your grandchild about the value of money.
Open an online savings account for your grandchild today to help prepare them for financial independence.
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