Best Savings Accounts for Your New Baby

Best Savings Account for New Baby

Saving money for a new baby is difficult. Parents have to juggle feeding and clothing a new family member on a reduced budget — and that’s just the first year. From there, the costs add up with childcare, education and extracurricular activities. In fact, the average cost of raising a child born in 2013 until the age of 18 for a middle-income family is $245,340, according to the latest annual “Cost of Raising A Child” report.

The costs don’t necessarily stop after children reach 18 years old, however. The average “moderate” college budget for the 2014-2015 school year was $23,410 for an in-state public college, reports College Data. For private colleges, the budget averaged $46,272. With these numbers, it’s no wonder that families want to start saving for their baby’s future as soon as possible.

Thanks to savings accounts, you can save money for your new baby so that you can afford the costs of raising a child. Read on to learn more about the different savings accounts for your new baby.

Best Savings Accounts for a Baby

The first step in choosing a savings account for a baby is figuring out what you need to save for, such as college or an emergency fund. Once you determine that, it’s easier to decide on the best savings accounts for your new baby.

Here are various savings options that parents and grandparents can take advantage of for the little ones in their lives:

Investment VehiclePurpose of AccountTax Advantages/DisadvantagesYield or ReturnsProsCons
Regular Savings AccountEmergency savings and general savings with no specific withdrawal time period in mind.Interest is taxable.Yes, depends on the interest rate.Withdraw at any time.Generally low interest rates.
Certificate of Deposit (CD)Good for goals with a fixed end date.Interest is taxable.Yes, depends on the interest rate.Higher interest rate than a regular savings account.Early withdrawal from a CD leads to penalty fees. Interest rate is fairly low.
529 College Savings PlanTo save money for college.Earnings in a 529 plan grow federal tax free and will not be taxed when the money is taken out for college; 34 states offer a full or partial tax deduction or credit; you can claim state tax benefits for every contribution.Yes, varies.The tax advantages.There are some risks and fees.

529 College Savings Plan

Also referred to as “qualified tuition plans,” a 529 college savings plan is a state-run savings plan. The sole purpose of this plan, which has many tax advantages, is to help families set aside money for future college costs.

There are two types of 529 college savings plans, including prepaid tuition plans and college savings plans, and each state sponsors at least one type. Prepaid tuition plans allows the account holder to purchase tuition credits at their present price for future years — an advantage since tuition will undoubtedly increase. But, the funds must usually be allocated toward tuition and other mandatory fees, and there might also be grade and age limits.

College savings plans are more common because funds can be allocated to additional expenses, such as the cost of books, a computer, and room and board.

CD Certificates of Deposit (CDs)

A certificate of deposit (CD) allows the holder to deposit a certain amount of money with a bank or credit union and grow interest on that amount. A CD has a fixed interest rate and maturity date. When the CD reaches its maturity date, the holder can withdraw their total earnings. The only downside to a CD: Many financial institutions will penalize you if you withdraw your funds before the CD’s term is up.

Read: 34 Savings and Money-Making Tips for Moms

Regular Savings Account

A savings account is one of the most basic ways to save. It provides security of the principal amount you deposit into the account, and if your account offers at least a modest interest rate, you can grow your savings for your baby over time.

Below is a table that demonstrates how much money you can earn by depositing $3,000 into savings accounts at Synchrony Bank, Ally Bank and BAC Florida Bank:

BankAccount NameInterest Rate (APY)Total Earnings After 5 Years (rounded to the nearest dollar)
Synchrony BankHigh Yield Savings Account1.75%$3,239.82
Ally BankOnline Savings Account1.75%$3,223.90
BAC Florida BankBAC Internet Savings0.25%$3,038

Disclaimer: Rates are current as of Aug. 20, 2015, and are subject to change at the financial institutions’ discretion.

If 529 plans, CDs or savings accounts don’t pique your interest, there are other options. “You can also put money away in a brokerage (investment) account with somebody like Fidelity or Vanguard,” said Cathy Derus, founder of Brightwater Financial. “This gives you the most investment options, mutual funds and stocks, and control over the assets.”

How to Save Money for College

Typically, the earlier you start saving money for your new baby, the better. You’ll want your balance to start earning compound interest right away so you can earn as much money as possible.

Let’s say Susie is 10 years old, and her parents decide to open a college savings plan so that she can go to a four-year public college in-state and have room and board covered. According to Fidelity’s college planner calculator, the total annual cost of college would be $17,336. If her parents made an initial deposit of $1,000 and contributed $12,000 annually into a 529 college savings plan, her parents would have a college surplus of $3,702, which can go to textbooks and other college costs.

But, let’s say Susie is 12 years old and the cost of college is still $17,336 at the same in-state college. With the same contributions in a 529 plan, her parents would have a college shortfall of $22,426.

“Parents should start saving right away because the sooner you start the quicker you will get to your goal,” said certified financial planner Joshua E. Self of Envision Wealth Planning. “Even if you start with $25 a month, it gets you into the habit. Don’t be discouraged by only having a small contribution because you’ll have the magic of compound interest on your side.”

Related: 10 Things No One Tells You About the Cost of College

Best Savings Account Rates for College Savings Plans

Depending on what savings plan you decide to go with, here are the average account rates for savings accounts, CDs and 529 college savings plans:

Account OptionsAverage Account Rates Nationwide
Savings Account0.07% APY
5-Year CD1.00% APY
1-Year CD0.36% APY

 *Rates according to FDIC. Rates were updated on Aug. 17, 2015, and are subject to change.

529 College Savings PlanTermCategory Average
US 529 Age 0-6 High Equity3 years11.35%
US 529 Age 0-6 Medium Equity3 years10.08%
US 529 Age 0-6 Low Equity3 years8.27%

*Source: Morningstar, Inc. Data as of 12/31/2013.

Self acknowledged that it’s difficult to determine what your new baby’s financial needs will be in 18 years. He suggested that if you’re unsure of exactly what you’re saving for, the 529 plan might not be the best savings account for a new baby because the money must be used for education. But, you do need to pick some type of savings account.

“If you’re unsure of where to put the money right away, that’s okay,” he said. “Just start saving now, get into the habit, and worry about the most efficient strategy later.”

Watch: How to Teach Your Children the Value of Saving Money