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Ask Dave

No CDs for Kids

Abe asks if it is a good idea to start a CD account for his two small children. Dave says no.

QUESTION: Abe asks if it is a good idea to start a CD account for his two small children. Dave says no.

ANSWER: No. A CD is a certificate of deposit. It’s simply a savings account at the bank that if you withdraw it early, it has a penalty. It doesn’t pay much more than a savings account pays right now—a tenth of a percent or something. There’s no reason to have it have a penalty for your children.

Is it a good idea to save money on behalf of your children? Sure. The primary place we would do that would be in a college fund in a good growth stock mutual fund into an Education Savings Account (ESA).

We also had savings accounts for each of our children when they were small that if they got excessive birthday money or a little money from here or a little money from there, we rolled some coins and put in there—whatever—maybe later on they put some babysitting money, and that was the money they were beginning to save all along for their car because we would not furnish a new car to a teenager in our house. We did agree—because we were financially able to—to match whatever they saved to buy their first car. That was their first big financial goal. They had little financial goals for spending and just buying a toy, and then they had giving and generosity lessons that we were teaching as well.

No, your kid does not need a CD. They probably need a simple savings account for you to have some teachable moments for them to learn about banking and so forth as you go along, and they definitely need a college savings account—something like an Education Savings Account (ESA)—in a good growth stock mutual fund.