5 ms·

What’s wrong with bank accounts for your kids? Sorry, this one doesn’t seem to fit with your other examples.

by bradfa 2mo ago

dagenix 2mo ago
Bank account interest is pretty much always less than inflation. So, money sitting in a bank account for 18 years is just losing value.
- deleted 2mo ago
  [deleted]
- Danox 2mo ago
  The object of the game is to live within your means, save and invest. More than half the population does not do that. When you’re 18 the treadmill starts turning if you don’t use your time wisely, you’re going to be in trouble at the end of life. When you are young, simple compounding is your friend because you have time. https://www.thewealthminded.com/finance-basics/how-compound-interest-works-and-why-its-your-best-friend https://www.thewealthminded.com/finance-basics/how-compound-... People have won the lottery and blown it all, some people who have extremely high paying professions in their youth, have over the course of time have also blown it all.
- FabHK 2mo ago
  While banks often pay crap rates, real rates (e.g. from government bonds) have largely been positive (except the short end after GFC and COVID). https://fred.stlouisfed.org/series/REAINTRATREARAT10Y https://fred.stlouisfed.org/series/REAINTRATREARAT10Y https://fred.stlouisfed.org/series/REAINTRATREARAT1YE https://fred.stlouisfed.org/series/REAINTRATREARAT1YE
theptip 2mo ago
The interest rate is very low.
wavemode 2mo ago
If all you're doing with a bunch of cash over 18 years (!) is holding it in a bank account to collect interest, you're just losing money to inflation. Bank interest is almost nothing. Better to hold stocks, or at the very least bonds if you're extremely risk-averse. Though this needs to be put in context - maybe you actually intend for the child to be permitted to spend the cash, in which case a bank account makes plenty of sense.
AussieWog93 2mo ago
The banks might pay 3% interest, whereas even non-volatile conservative investments like cap notes or bonds would pay something like 7%. Plugging it into a calculator: 1.03 ^ 18 = 1.70 1.07 ^ 18 = 3.37 Example numbers, but you're effectively taking half of the money that your kid would have had on their 18th birthday, and giving it to a banker.
- MBCook 2mo ago
  3% is amazingly good. It’s not hard to beat that, but a savings account at a common bank can easily be below 0.05%. I looked up BoA. 0.04%.
  - eks391 2mo ago
    3% is becoming more common as of the last few years, at least in the US. I know several banks off the top of my head that offer 3.5% or higher (and more if you are a new customer) for their savings accounts. I would persuade people who use banks that haven't moved on from near-zero APY to move on themselves.
    - MBCook 2mo ago
      Yeah just off the top of my head I’d expect Discover and AmEx to be around 3.5%. Apple is at 3.4%. I moved away from near 0% savings accounts more than 20 years ago, it’s amazing to me it’s still so common. You don’t have to try very hard or go wrong to someone you’ve never heard of to get a good rate.
      - wingworks 2mo ago
        The rate goes up and down with inflation, high inflation, high interest - low inflation, low interest. But even then, yes some banks still offer no or 0.5% accounts.. because they can, and many people can't be bothered to figure out a better option, or "trust" there bank and don't want to move. (or the bank has high interest account, but make it complicated to use)
lostaccount 2mo ago
Not OP, but I think they are referring to the fact that you can get tax advantaged accounts instead of a standard savings account. Not to mention the interest rate on those accounts is basically a rounding error.
- what 2mo ago
  A child can not get a tax advantaged account. You need earned income to contribute to those.
  - spacefan1984 2mo ago
    If you track chores you can actually set up your kids with a Roth 401k. For example, this company takes care of it for you https://www.halfmore.co/ https://www.halfmore.co/
    - what 2mo ago
      No. You can not consider payment for chores as earned income.
CliffyA 2mo ago
As the OP has "Aussie" in their name I think they'd be referring to the Commonwealth Bank of Australia Dollarmites accounts. They were shutdown recently after a watchdog investigation. It was locking kids into using the bank that would continue into adulthood and schools were getting paid to sign kids up. https://www.morningstar.com.au/personal-finance/the-lessons-from-dollarmites https://www.morningstar.com.au/personal-finance/the-lessons-... "They found that it provided little value for children and the largest outcome was that children were being exposed to ‘sophisticated’ marketing tactics."
- AussieWog93 2mo ago
  Funnily enough the two people we heard that "advice" from were Brits and Saffas. It's just bad interest yields compounding over decades.
MBCook 2mo ago
My checking account isn’t the best out there at 1%. Same with my savings account at 3.4%. Neither of those is anywhere near inflation. You are effectively losing money by parking it there. Most checking accounts don’t pay interest at all. I looked up Bank of America's savings account: 0.04%. You read that right. Effectively zero. And it’s a flat rate. Whether you have $10 or $10 million in there.
GuB-42 2mo ago
From a return on investment perspective, it is not great. Bank accounts are convenient and safe, but you pay the price with low interest rates. But if you don't intend to touch that money for 18 years, you don't need the ability to withdraw at any time without losing money that a bank account offers, so why pay the price for it? However, it has symbolic and educative value, teaches the value of saving, how interest works without going into the complexities of the financial system, and making it clear to your kids that it is their money, even if they can't touch it yet. So it may be a good thing for that reason, when the sums are reasonable.
zarzavat 2mo ago
You should invest in different things depending on your age. An old person might want to have more of their money in yielding assets. They are withdrawing from the account so the certainty of having predictable value might outweigh the inflation risk. Savings intended for a young child should be allocated almost entirely into equities. They are not affected by drawdowns since they won't be withdrawing from the account for a decade or two, but inflation is a primary concern. A bank account is a particularly bad place to put savings intended for a child long-term. A good high yielding account might barely keep pace with inflation, but it's unlikely to grow much in real terms. The average bank account will lose money in real terms in that 10-20 years.
hiddencost 2mo ago
Inflation over a long time horizon is about 3%. Especially if it's going to be a decade or more, just put it in an index fund.

What’s wrong with bank accounts for your kids? Sorry, this one doesn’t seem to fit with your other examples.

by bradfa 2mo ago

What’s wrong with bank accounts for your kids? Sorry, this one doesn’t seem to fit with your other examples.

Bank account interest is pretty much always less than inflation. So, money sitting in a bank account for 18 years is just losing value.

deleted 2mo ago
[deleted]
Danox 2mo ago
The object of the game is to live within your means, save and invest. More than half the population does not do that. When you’re 18 the treadmill starts turning if you don’t use your time wisely, you’re going to be in trouble at the end of life. When you are young, simple compounding is your friend because you have time. https://www.thewealthminded.com/finance-basics/how-compound-interest-works-and-why-its-your-best-friend https://www.thewealthminded.com/finance-basics/how-compound-... People have won the lottery and blown it all, some people who have extremely high paying professions in their youth, have over the course of time have also blown it all.
FabHK 2mo ago
While banks often pay crap rates, real rates (e.g. from government bonds) have largely been positive (except the short end after GFC and COVID). https://fred.stlouisfed.org/series/REAINTRATREARAT10Y https://fred.stlouisfed.org/series/REAINTRATREARAT10Y https://fred.stlouisfed.org/series/REAINTRATREARAT1YE https://fred.stlouisfed.org/series/REAINTRATREARAT1YE

theptip 2mo ago

The interest rate is very low.

wavemode 2mo ago

If all you're doing with a bunch of cash over 18 years (!) is holding it in a bank account to collect interest, you're just losing money to inflation. Bank interest is almost nothing. Better to hold stocks, or at the very least bonds if you're extremely risk-averse. Though this needs to be put in context - maybe you actually intend for the child to be permitted to spend the cash, in which case a bank account makes plenty of sense.

AussieWog93 2mo ago

The banks might pay 3% interest, whereas even non-volatile conservative investments like cap notes or bonds would pay something like 7%. Plugging it into a calculator: 1.03 ^ 18 = 1.70 1.07 ^ 18 = 3.37 Example numbers, but you're effectively taking half of the money that your kid would have had on their 18th birthday, and giving it to a banker.

MBCook 2mo ago
3% is amazingly good. It’s not hard to beat that, but a savings account at a common bank can easily be below 0.05%. I looked up BoA. 0.04%.
- eks391 2mo ago
  3% is becoming more common as of the last few years, at least in the US. I know several banks off the top of my head that offer 3.5% or higher (and more if you are a new customer) for their savings accounts. I would persuade people who use banks that haven't moved on from near-zero APY to move on themselves.
  - MBCook 2mo ago
    Yeah just off the top of my head I’d expect Discover and AmEx to be around 3.5%. Apple is at 3.4%. I moved away from near 0% savings accounts more than 20 years ago, it’s amazing to me it’s still so common. You don’t have to try very hard or go wrong to someone you’ve never heard of to get a good rate.
    - wingworks 2mo ago
      The rate goes up and down with inflation, high inflation, high interest - low inflation, low interest. But even then, yes some banks still offer no or 0.5% accounts.. because they can, and many people can't be bothered to figure out a better option, or "trust" there bank and don't want to move. (or the bank has high interest account, but make it complicated to use)

lostaccount 2mo ago

Not OP, but I think they are referring to the fact that you can get tax advantaged accounts instead of a standard savings account. Not to mention the interest rate on those accounts is basically a rounding error.

what 2mo ago
A child can not get a tax advantaged account. You need earned income to contribute to those.
- spacefan1984 2mo ago
  If you track chores you can actually set up your kids with a Roth 401k. For example, this company takes care of it for you https://www.halfmore.co/ https://www.halfmore.co/
  - what 2mo ago
    No. You can not consider payment for chores as earned income.

CliffyA 2mo ago

As the OP has "Aussie" in their name I think they'd be referring to the Commonwealth Bank of Australia Dollarmites accounts. They were shutdown recently after a watchdog investigation. It was locking kids into using the bank that would continue into adulthood and schools were getting paid to sign kids up. https://www.morningstar.com.au/personal-finance/the-lessons-from-dollarmites https://www.morningstar.com.au/personal-finance/the-lessons-... "They found that it provided little value for children and the largest outcome was that children were being exposed to ‘sophisticated’ marketing tactics."

AussieWog93 2mo ago
Funnily enough the two people we heard that "advice" from were Brits and Saffas. It's just bad interest yields compounding over decades.

MBCook 2mo ago

My checking account isn’t the best out there at 1%. Same with my savings account at 3.4%. Neither of those is anywhere near inflation. You are effectively losing money by parking it there. Most checking accounts don’t pay interest at all. I looked up Bank of America's savings account: 0.04%. You read that right. Effectively zero. And it’s a flat rate. Whether you have $10 or $10 million in there.

GuB-42 2mo ago

From a return on investment perspective, it is not great. Bank accounts are convenient and safe, but you pay the price with low interest rates. But if you don't intend to touch that money for 18 years, you don't need the ability to withdraw at any time without losing money that a bank account offers, so why pay the price for it? However, it has symbolic and educative value, teaches the value of saving, how interest works without going into the complexities of the financial system, and making it clear to your kids that it is their money, even if they can't touch it yet. So it may be a good thing for that reason, when the sums are reasonable.

zarzavat 2mo ago

You should invest in different things depending on your age. An old person might want to have more of their money in yielding assets. They are withdrawing from the account so the certainty of having predictable value might outweigh the inflation risk. Savings intended for a young child should be allocated almost entirely into equities. They are not affected by drawdowns since they won't be withdrawing from the account for a decade or two, but inflation is a primary concern. A bank account is a particularly bad place to put savings intended for a child long-term. A good high yielding account might barely keep pace with inflation, but it's unlikely to grow much in real terms. The average bank account will lose money in real terms in that 10-20 years.

hiddencost 2mo ago

Inflation over a long time horizon is about 3%. Especially if it's going to be a decade or more, just put it in an index fund.