Kids Savings Accounts: Good for kids or good for the bank?​

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itrust_invest June 12, 2019

Saving or Spending?


First we should differentiate between kids accounts for spending, and kids accounts for saving; as they both have very different outcomes.


Kids savings accounts for spending are essentially adult products tweaked for low value child usage. They are a very cumbersome way to manage a child’s pocket money, and have very little educational purpose. These days there are a range of speciality products for children that take advantage of the transition to the cashless society, which allow parent to control the spending of their children through a managed debit card.


People think so called high interest savings accounts for kids are good vehicles for long term savings, because they come from big banks that appear to be trustworthy. But according to Warren Buffett,  “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” Many of these accounts barely outperform the inflation rate, and overtime if the fee’s can actually result in a lower actual value than when started. In short, The Buff says No to savings accounts!


Very harsh rules


Some of these products offer inducements to get people to sign up, but often there are murky hidden rules that take away the benefits for the most minor infractions. An example is the Westpac “Bump Account”, where they offer a $200 bonus for following a very strict savings plan for 16 years, which can be lost for very minor reasons. They offer a slightly higher interest rate, but to get this you have to make a contribution every month, and missing one contribution will result in loss of the higher interest rate and the cash bonus. Worst of all, $200 in 16 years will have a significantly lower value than it does today. Learn more on why they win the shonky award here: https://www.choice.com.au/shonky-awards/hall-of-shame/shonkys-2017/westpac-bump-savings


Opportunity cost


By choosing a high interest savings account over other investment products, you can actually loose the benefits of the better investment. The table below shows the difference in investment results over a 10 year period:



In short, savings accounts are very much in the favour of the bank, giving a little bonus in exchange for a lifetime customer of credit cards and loans is a very bad deal. Lastly, the banks claims that they are teaching a child how to save border on the ridiculous, as put by Choice Magazine, “Claims of teaching “the importance of saving at a young age” abound, but getting ripped off by a bank is a hard way for a child to learn a lesson.