Savings vs investing for kidsSavings vs investing for kids

When it comes to giving your kid a head start with money, you're probably weighing up two options: a kids savings account or investing. 

The good news? Both options are great—and the time you’re putting into planning now will give the child in your life a real head start. However, it’s important to note that these two strategies can produce different outcomes and the key lies in surveying which option is best suited for your child and your financial considerations.

This guide breaks down the essential details of both strategies to help you feel informed when it comes to your financial planning. 

Kids savings account 

A kids savings account is the traditional starting point for teaching children about money. These accounts are specifically designed by Australian banks and credit unions to encourage young savers, often offering features that reward disciplined saving habits. Your little one can see their pocket money or birthday cash grow while earning a return. 

To find suitable kids savings accounts in Australia, look for accounts that offer a high variable interest rate, usually achieved by meeting specific conditions, such as making a minimum deposit and no withdrawals in a calendar month.

Benefits of kids savings accounts

• Security: A kids savings account guarantees your money. You will always have the amount you put in, plus interest.

• Teaches saving habits: Children learn how to save and see tangible changes when they add to their account. 

• Easy access: You can get the money out instantly if you need it for a short-term goal or unexpected emergency. 

• No hidden fees: Most of these accounts are completely free to run. They don't charge monthly account fees, so every cent of the interest your child earns stays in their account.

Limitations of kids savings accounts

• Shrinking value: Over longer timeframes (ten plus years), the interest from a savings account often doesn’t keep up with inflation. So even though the balance grows, its actual buying power can shrink.

• Interest rate limits: Some banks apply their highest interest rate only to a set portion of your savings, with limits on how much earns that rate. Something to keep in mind!

Investing for kids

While a kids savings account is excellent for short-term goals (under five years), investing for kids is preferable for long-term goals like university, a car, or a first home deposit. 

And, with Sharesies Kids Accounts, it’s a great opportunity to look at the benefits of starting investing early and the ways you can invest on behalf of kids. 

Investing vs savings accounts

At the core, they work differently in how they help your money grow.

• Savings: Earns a variable interest rate on the principal balance.

• Investing: Earns a return through capital growth (the asset value increasing) and income (dividends/distributions).

Benefits of investing for kids

• The power of time: Starting investing now allows returns to earn their own returns over 15-20 years, often leading to larger final balances than saving alone.

• Beats inflation: By earning returns that have historically been around seven to ten percent, investing helps make sure your child’s savings don’t just grow—they grow in buying power.

• Tax-free handover: Using the correct legal structure, you can transfer the assets to your adult child at age 18 without triggering capital gains tax for you.

• Financial literacy: Provides a hands-on way for children to learn about markets, growth, and dividends, making financial concepts tangible and relevant.

Limitations of children’s investments

• Market risk: The investment value is not protected (no capital guarantee) and contains an element of risk. It can go down as well as up, making this strategy unsuitable for any money you might need within the next five years.

• Money isn't readily available: Unlike a savings account, pulling money out of investments (like selling shares) takes time (a few days for trades to settle) and may incur transaction fees or penalties, so the funds are not instantly accessible if needed.

Saving vs investing

There isn’t one perfect path. Opening both a kids savings account and creating an investment portfolio typically covers both short-term and long-term financial goals.

For short-term goals (one to five years), such as saving for a new bike, the recommended strategy is saving, and the best tool is a high-interest kids savings account Australia that meets its bonus interest criteria to teach financial discipline. 

For long-term goals (over ten years), like buying a car or a future house deposit, the strategy shifts to investing.

By employing this dual approach, you’re helping ensure your kid benefits from both a savings account and investing.