Most grandparents love helping out their grandchildren when they can.
Some grandparents help out by watching their grandkids while their parents work. Others want to contribute in other ways, such as monetarily.Jump To:
- Before You Get Started…
- 1. Savings Account
- 2. Certificates of Deposit
- 3. Brokerage Account
- 4. UGMAs/UTMAs
- 5. 529 Education Savings Plans
- 6. 529 Prepaid Tuition Plans
- The Decision Is Yours
It’s important to realize that not every grandparent will be able to financially help out their grandkids.
That said, many grandparents do want to set aside some money to help their grandchildren.
The reasons vary. Some grandparents may have struggled to afford their education or their first home. They simply want to help their grandkids get an easier start to their life.
Others want to help their children avoid the burden of saving for their grandchildren’s college educations — or taking on student loan debt.
No matter the reason, grandparents can save for their grandchildren in many ways.
So, if a grandparent is asking you how to contribute to your child’s financial future or you’re the grandparent wanting to help out, here are a few options that may work for you.
Before You Get Started…
Before you get started, realize that how you choose to save for your grandchild’s future matters.
Who owns the funds?
First, it matters whether you keep the funds in your name or put them in your grandchild’s name.
The money you save could hurt your grandchild’s financial aid application. This is mainly true if the money is in your grandchild’s name.
The Free Application for Federal Student Aid (FAFSA) calculates how much financial aid a person should get based on a specific formula.
That formula heavily penalizes students for money held in their name when determining their ability to pay for college.
Access to the funds
Next, if the money is put in your grandchild’s name, they may be able to access the money before you intended them to use it.
They may also use the money in ways other than what you intended for them to use it for.
Once a child turns 18, or 21 depending on the state, a child can usually access any funds in their name. That also means they can use them for whatever they see fit.
You can keep control of how the money is used if you keep it in your name and simply name your grandchild a beneficiary.
This way you won’t have to deal with an 18-year-old blowing thousands of dollars tricking out an old car.
1. Savings Account
One of the easiest ways to save money for your grandchild is a savings account. Unfortunately, the easiest choices are rarely the best choices.
Putting money in a savings account means the money you set aside for your grandchild won’t decrease in a total dollar sense. Most savings accounts are FDIC-insured up to $250,000.
The interest rates offered on most savings accounts are usually below the rate of inflation.
This means the purchasing power of the money you put away today could decrease over time.
This is especially true if the inflation rate constantly exceeds the rate you earn on the money.
If you do decide to open a savings account to set aside money for your grandchild, make sure you pick a high-yield savings account.
Picking a savings account with a competitive rate can help offset inflation as much as possible.
2. Certificates of Deposit
If you’re looking for a higher return than a savings account but still want the security of knowing the money you set aside won’t technically decrease, consider certificates of deposit (CDs).
CDs allow you to earn a higher interest rate on your money in exchange for the promise that you won’t withdraw the money for a certain period.
Terms of CDs can be as short as a few months or as long as many years. The longer-term CDs generally offer higher interest rates.
Keep in mind, you may not want to lock into a long-term CD if interest rates are on the rise.
Why? CD rates are fixed when you start the CD and don’t change in most cases.
3. Brokerage Account
If you’re willing to endure risk for potentially higher returns, you may want to invest the money you’re setting aside in a brokerage account.
Opening a brokerage account allows you to invest in stocks, bonds, mutual funds, ETFs and other types of investments.
The most attractive part:
These investments may provide higher returns than savings accounts and CDs over…
This article was sourced from MyBankTracker.