Investing in a certificate of deposit is a safe way to earn interest on your savings — provided you’re willing to leave the funds in the account until it matures. Because CDs are simple to understand, they’re a great way to teach children about saving — and a CD might just be the best savings account for kids starting out in the investment world.
If you’re seeking a great way to get your child started in the savings arena — and teach him the benefit of patience when it comes to investing — learn how to open a CD account you can both watch grow. Your child will love the responsibility — and it’s never too early to learn how to invest.
Open a Custodial CD Account
When opening a CD for a child, choose a custodial CD account, which is a designated account for minors. A custodial account puts you in charge of the account until the minor turns 18 — or 25 in some cases. Keeping control of the account can prevent your child from making mistakes like spending all of the money instead of saving it.
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Consider an Online CD Account
If you’re buying a certificate of deposit for a child, consider an online bank. At many online banks, you’ll get higher CD interest rates than at more traditional financial institutions. Because credit unions don’t have as much overhead as brick-and-mortar banks, they usually pass the savings on to account holders.
Whether you go with an online or traditional bank, set up an online account so you and your child can check on the CD anytime. Seeing how interest makes the account grow can be a great incentive for your child to embrace saving money.
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Tech-savvy kids might also get a kick out of all the capabilities of an online or mobile account, including the ability to transfer money between accounts or set up automatic deposits. Every child should have an introduction to these essential banking transactions.
Once you teach him about CDs, encourage your child to save in different ways, too. For example, many banks offer kids savings accounts, which might be a great next step.
Manage Your Child’s CD Account
To start investing for your child, open a custodial CD account in his name with your name as the custodian. You’ll have to provide personal information about your child, including his Social Security number. Most banks allow you to control the amount of online access your child will have to the account, including restricting money transfers or setting up text alerts for any account transactions.
One way to start a consistent plan of saving for your child is to build a CD ladder, which involves investing money in a sequence of CDs that mature at different intervals — with CDs coming due every year. You can add a new rung at the end of the ladder every time a CD matures. Teaching your child how to ladder CDs might persuade him to continue rolling over the CDs even after he has legal access to the account.
Discuss CD Penalties With Your Child
One way of discouraging your child from spending his savings is to discuss the penalties that come with most CDs. Unlike traditional savings accounts, CDs generally have financial penalties if you take the money out before they mature. For example, Chase Bank charges a penalty of between 1 percent and 2 percent of your funds if you withdraw from a CD prematurely, depending on the CD’s maturity term.