DJC#018 – High Yield Savings Accounts: Ditch Your Bank’s Low Interest Rate

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As parents, one of our jobs is to teach our children about money – what it is, how to earn it, save it, invest it and even spend it. If you have a savings account set up for your child already, then bravo to you! If you’re now thinking oh no, I guess I should’ve done that already, then go open one once you’re done reading.

As easy and convenient as it is to go to you local bank to open up an account for your child, it’s likely not the best place to open one. I made that mistake with our son. I walked into Chase one day and walked out having handed over our son’s savings and all he got was a 0.01% annual percentage yield (APY) and a plastic piggy bank. He actually still uses the piggy bank, so I guess it wasn’t a complete waste.

Today I’m going to discuss high yield savings accounts (HYSA) and their benefits for your child. If you’ve already got this set up for your child, then congrats, you can skip to the next chapter.

What’s A High Yield Savings Account?

A high yield savings account is a type of savings account that typically offers a higher interest rate compared to regular savings accounts. These accounts are usually offered by online banks and financial institutions and are designed to help your money grow more quickly over time. The interest rates associated with high yield savings accounts are often considerably higher than those offered by traditional banks. Currently there are rates as high as 5.00%!

Does anyone remember ING Direct? They were one of the first online banks on the scene back in the the ’00s. ING’s thing was that they offered higher savings rate than your bank so you could stick any money that you were saving for say a new car or that detachable face car stereo, and earn more interest. I opened one after getting my first job so I could start stacking my chips because their APRs were higher for regular savings accounts. The higher rates, the quicker the interest compounds, the more money you have.

Remember that 0.01% APR I was talking about? Well if you put $100 in your child’s account, they’d end up with a whopping $100.01 at the end of one year. Yes, you read that right. One single penny. That’s just criminal that banks even offer an account with a rate so low. There are literally online banks with checking accounts that have higher interest rates!

Benefits of A High Yield Savings Account for Your Kid

The primary advantage of a high yield savings account is the higher interest rate it offers. With traditional savings accounts, the interest rates can be quite low, meaning your child’s money may not grow as rapidly. High yield savings accounts, on the other hand, offer significantly higher interest rates, allowing their savings to accumulate at a faster pace.

High yield savings accounts often utilize compound interest, where the interest earned is reinvested to earn additional interest. This compounding effect can greatly boost your child’s savings over time, helping them accumulate a substantial nest egg for their future endeavors.

Many high yield savings accounts come with minimal or no monthly fees, ensuring that your child’s savings are not diminished by unnecessary charges. This allows them to maximize their savings potential and keep more of their money working for them. Now I don’t believe in fees, especially when it comes to savings accounts – it kind of defeats the purpose. So please make sure there’s no fees subtracting any interest your child’s making.

High yield savings accounts offered by online banks provide convenience and accessibility, allowing your child to manage their savings easily. With online banking features and mobile apps, together you can monitor their account, make deposits, and track their progress effortlessly.

By opening a high yield savings account for your child, you can introduce them to important financial concepts such as saving, budgeting, and compound interest. It serves as an excellent educational tool, teaching them valuable lessons about money management from an early age. I show our son his account all the time, especially after the monthly interest is added in. Remember, they might not get it at first, but if you continue to talk about the topic, they’ll pick up on it and it’ll eventually make sense.

Downsides of HYSAs

There is really only a couple downsides of HYSAs that I see , which is there’s not a physical bank. This can be a little challenging when it comes to depositing their money into the bank.

I think it’s a great idea to take your child into the bank with their money and physically deposit it. I know this is kind of old school, but they’ll remember this and it will be part of the savings process. What I do with our son is when his piggy bank is full, we take a trip to our bank and deposit the money into our account. I have him physically hand the teller the cash. Once the money is in our account, I transfer it to his Capital One HYSA and then show him that the money is now in his savings account. It allows him to see the money in his account, and he can see it growing and the progress over time.

The other downside, is that most of the children’s savings account products are not HYSAs. For example, the Capital One Kid Savings Account has a rate of 0.30% APY, while the adult version is 4.15% APY. So technically it’s my wife and my savings account, but at some point we’ll transfer the money to our son’s name or use it for a large expense for him (we’re not planning to save a lot of money in this account, so we’re not foreseeing any major tax issues).

A Few Things to Consider When Choosing an HYSA

While high yield savings accounts offer numerous benefits, it’s crucial to consider certain factors when selecting the right account for your child:

1. Interest Rates: Compare the interest rates offered by different financial institutions to ensure you’re getting the highest possible return on your child’s savings.
2. Minimum Deposit and Balance Requirements: Some high yield savings accounts may require a minimum deposit or have balance requirements. So if there’s a high minimum, keep looking elsewhere until you find the place that’s right for you.
3. FDIC Insurance: Ensure that the high yield savings account you choose is FDIC-insured. This protects your child’s savings up to $250,000 per depositor, per institution (yes, I know this is highly unlikely, but hey you never know).

Here is a list of the best high yield savings account rates at the time of this newsletter per Bankrate.

Take HYSA Action

Opening a high yield savings account for your child is a wise financial decision. If you don’t have one for yourself, then definitely open take care of that at the same time. These accounts offer higher interest rates, compound interest, low fees, and convenient access to funds, providing a strong foundation for your child’s financial future. By introducing them to the concept of saving early on, you empower them with valuable financial knowledge that will serve them well throughout their lives.

Now keep in mind that this is only one of the financial pillars you should be using for your child. This is just the beginning – it’s only Level 1. We’ll jump into investment accounts for children in the next newsletter.

Remember, as parents, we have the power to make a significant impact on our children’s financial well-being, and that starts with us. Let’s take advantage of high yield savings accounts to secure a prosperous future for us and them.