Hey Kids: Here’s a Way to Save

For generations, parents have relied on a simple argument to get their kids to save: Take your coins and dollar bills to a bank, and you’ll get back more than you put in. Banks are happy to drive home the message. At North Akron Savings Bank in Ohio, a character named Dollar the Dragon tells kids in an online newsletter that a savings account can help them “keep money in a safe place and even earn more.” A newsletter of the American Bankers Association encourages kids to start a savings account, “then sit back and watch” the money grow.

There’s just one problem, of course: When it comes to paying interest on those savings, not much is growing these days. With the Federal Reserve keeping interest rates close to zero, the average annual percentage yield on an ordinary bank savings account has fallen to 0.21 percent. Total earnings for kids who manage to sock away $1,000: $2.10 a year, or about enough to treat Mom or Dad to a cup of coffee. “It’s basically a war on the savers,” says Ian McCulley, an analyst at Grant’s Interest Rate Observer.

For their part, banks say it still pays to encourage kids to save, even if the rewards are harder to explain. Laura Fisher, director of the American Bankers Association’s Education Foundation, says current income isn’t the main reason to encourage kids to sock away money anyway. Children, she says, should be taught to open accounts because “the bank is a safe place for their money.”

Still, the determined parent does have options: higher-paying alternatives that, for the most part, happen to be equally good for adults as well as Junior. These alternatives won’t create a generation of future Gatsbys, but, experts say, the yields might be enough to keep kids interested.

I Bonds
No, this isn’t a Steve Jobs–invented touchscreen for fixed-income investing. It’s a U.S. Treasury savings bond designed to yield a safe, inflation-protected return on investments of up to $5,000 a year. (These bonds, of course, are also available to adults, who must make the purchases for kids under 18.) Series I bonds yield a fixed rate—unchangeable for the life of the bond—plus an additional adjustable rate that the Treasury resets every six months based on the consumer-price index. So if the inflation rate goes up, interest on the bond goes up too.

I bonds recently offered an initial annual percentage yield of 1.74 percent, more than eight times the average yield on ordinary bank savings accounts. Although paper I bonds come in fixed denominations, those who buy through the government’s TreasuryDirect Web site can get a bond of any amount, to the penny, between $25 and $5,000. That means if Junior has saved up $137.46, you can buy a bond for that amount. The drawback is that the bonds can’t be cashed in for the first 12 months, and redemption before five years loses the last three months’ worth of interest.

Online Savings Accounts
Here’s what you’ll miss with online accounts: the chance to take your child by the hand, wait in line in the lobby and introduce her to the friendly teller behind the counter. What you could get instead is a higher interest rate and no fees, provided you look carefully. But keep in mind, many institutions require that customers have an existing account to electronically fund a new online savings account.

While not all such accounts are aimed at kids, some credit card companies with banking units, as well as other financial institutions, offer online savings accounts with yields above 1 percent. The catch is that they sometimes require initial deposits in the hundreds or even thousands, though American Express says there’s no minimum deposit or minimum balance for its online account (recent yield: 1.3 percent).

A new player in this field, student-loan giant SLM (better known as Sallie Mae), offers an online savings account with an annual percentage yield of 1.4 percent, with no minimum deposit or monthly fees. While Sallie Mae aimed its initial marketing at adults, a spokesperson says the company plans to make these accounts available to kids. Other players offering decent yields in online accounts include ING Direct, a unit of the giant Dutch banking and insurance concern ING Groep, and Ally Bank, whose parent, Ally Financial, was formerly known as GMAC.

Saving in School
A handful of banks—mostly small community banks—have taken steps to resurrect school-based savings, a formerly widespread program that had all but disappeared in recent decades. And to attract these young customers, some of these banks offer students significantly higher interest rates on small deposits than are available for grown-ups’ accounts.

More than 40 banks have opened outposts in schools around the country, according to the Federal Deposit Insurance Corp., though they’re not exactly household names. Among them: Clinton Savings Bank in Bolton, Mass.; Evans Bank in West Seneca, N.Y.; and Thayer County Bank in Hebron, Neb. Cardinal Bank, a unit of Cardinal Financial in McLean, Va., recently opened student-run “branches” in 11 elementary and middle schools in Virginia and Washington, D.C., with more on the way. Cardinal offers an annual yield of 2.5 percent on student account balances of up to $1,000. F. Kevin Reynolds, the bank’s president, won’t disclose how much money is in the 7,200 school accounts, but “it’s a lot more than you think,” he says.