Ace Accounts For Young Savers

Five top tips to help you make the most of your children's savings.

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It's generally accepted that parents (or grandparents and other relatives) are responsible for teaching children about the benefits of saving. After all, teaching personal finance has never been high on the national curriculum, although the government is trying to improve financial literacy in schools.

However, what if we adults have practically forgotten how to save? My question isn't a flippant one, because saving has fallen far out of favour. The proof lies in the fact that the savings ratio -- the proportion of our take-home pay which we save -- has crumbled in the past fifteen years.

In 1992, we saved 11.7% of our take-home pay, or more than one pound in every nine. This was during the last recession, when we tightened our belts in order to ride out the housing crash. Alas, the recent boom has had the opposite effect: increased housing wealth has pushed saving onto the back burner.

By early 2007, we saved just one pound in every forty, or 2.4% of our pay. Last year, saving hit its lowest level since 1959, during the post-war austerity years. The good news is that we may have turned the corner, as the savings ratio has begun to creep up.

So, if adults have forgotten how to save, what lessons should we pass on to our sons, daughters, nieces, nephews and so on? I have five key messages:

1. It's much better to be a saver than a borrower, because earning interest beats paying it. As a saver, you can earn interest at, say, 6% a year. On the other hand, borrowing on a credit card could cost you, say, 18% a year in interest. Ouch!

2. To make the most of the savings habit, it makes sense to put money aside regularly. This teaches financial disciple, plus regular-savings accounts pay the very highest rates of interest.

3. When looking for a savings account, track down a table-topping rate of interest. The power of compounding means that the higher your interest rate, the faster your money will grow.

4. Make sure that you check the small print for pitfalls, looking for these Six Snags With Savings Accounts.

5. Watch out for the taxman. Although the vast majority of children don't pay tax on their savings, yearly interest on cash gifts from parents can be taxed if it exceeds 100 per parent. However, UK residents aged sixteen and over can save in a delightful tax-free savings account known as a cash ISA.

As mentioned in my second tip, regular-savings accounts pay the highest rates of interest. Indeed, it is possible to earn a fixed, tax-free interest-rate of a whopping 10% a year on money saved for a child. The Children's Regular Saver from Halifax and Bank of Scotland pays this rate on monthly deposits of between 10 and 100 for one year.

The downside is that this account is, in effect, a one-year bond which requires you to make twelve consecutive monthly contributions. Also, you cannot withdraw money unless you close your account and forfeit most of your interest. Nevertheless, 10% a year is a mouth-watering rate, so my son and daughter both have Children's Regular Saver accounts.

Finally, if you or your child cannot commit to saving regularly, then scout around for a Best Buy children's savings account which offers easy access. I'm keen on these three high-street accounts, all of which have a minimum balance of 1:

Good luck with teaching your youngsters the (financial) facts of life!

Take a look at our savings centre where we've got a range of great savings accounts for grown-ups. The Kaupthing Edge account pays 6.5%!