Saving money and investing money are both important for building a solid financial future, but they aren't the same thing. Before looking for the best bank account or investment accounts for kids, determine whether your child needs to save, invest, or both.
The differences between saving and investing
Investing money and saving money both involve setting aside funds for later. But beyond that, they are very different.
Saving means keeping money in an account that will keep it protected. That could be in an FDIC-insured savings account, money market account, or a Certificate of Deposit (CD) account. With traditional savings, there is virtually no risk of losing any of the money you've set aside. There's also not much reward. You may have to pay a small maintenance fee and though you will earn some interest on your money, it most likely won't get you high returns.
Investing, on the other hand, is the process of putting your savings to work to earn more money. You can invest it in stocks, bonds, real estate, Pokemon cards, and anything else you believe will increase in value over time. When you invest money, there's always a risk you could lose some of your investment—but you'll also have an opportunity to earn greater returns as your investment increases in value.
When to save and when to invest
Everybody needs savings, whether you're stashing money away for something special or setting aside extra funds to be ready for the unexpected. Learning to save early in life can help kids grow into more financially successful adults.
It's wise to start your child off with a savings account to get them in the habit and help them experience the excitement of watching their savings build over time. A savings account is best for money that your child may need or want to access within the next few years.
After your kids have accumulated some savings, it may be a good idea to start teaching them about investing. Kids who have some experience saving may be excited to learn that investing can amplify their savings and make it grow more quickly—although there is more risk involved. Money Missions, available in the GoHenry app, offers easy-to-understand education about investing and other financial topics.
It's best to invest money your child won't need to access for at least five years because it takes time for investments to grow. Even if the value of your investment dips, five years (or more) allows time for it to rise again and build greater returns.
By allowing kids to learn the lessons of saving and investing with their own money, parents can help instill important financial lessons for life.