Want your child to succeed? A savings account may help

By Maryalene LaPonsie

When his son was 4, David Bakke took him to the local bank to open a savings account. Turns out, he may have been doing more than providing a feel-good moment for his son. Bakke may have also been starting him on the path to a college degree and financial success later in life.

Conventional wisdom has long suggested youth bank accounts are a good way to introduce the concepts of saving and budgeting. However, new studies are showing these accounts may do much more.

From increasing a child's chances of attending college to improving the odds they will someday hold a diversified investment portfolio, having a bank account may offer multiple benefits to those who get to experience it at young age.

Research supporting child development accounts

The Center for Social Development has been one of the early and leading advocates of the benefits of savings accounts. The center's founding director, Michael Sherraden, first suggested the value of the accounts -- which he dubbed child development accounts -- in his book "Assets and the Poor."

Since the book's publication in 1991, the center has supported additional research and pilot projects to test the positive effects of child development accounts. Operating within the George Warren Brown School of Social Work in Washington University, St. Louis, the center's most recent research suggests college savings accounts containing as little as $1 result in students being up to seven times more likely to attend college.

"We are cautious because our standards of evidence are high," Sherraden says. "At this point, evidence indicates that even modest savings and asset accumulation, especially dedicated for children, has positive impacts for children."

Meanwhile, other research conducted at the University of Kansas found children who had savings accounts established at a young age were likely to become more financially successful than their peers. They tend to accumulate more assets -- an average of $2,000 compared to $100 for those who did not have a savings account as a child -- and were four times more likely to invest in stocks as adults.

States hoping to send more kids to college

The research may not be news to parents.

"It's not surprising to me at all," says Bakke, who is a contributor to personal finance site Money Crashers. "Children with savings accounts will be more mature and responsible with money, two key concepts that lead to financial success."

However, states are now using the findings on child development accounts to pilot programs intended to get more kids into college.

The Center for Social Development (CSD) worked with Oklahoma to create that state's Seed Program for Oklahoma Kids. That program, started in 2007, randomly selected 1,360 newborns to receive $1,000 in a college savings account. Known as Seed OK accounts, those earning less than $43,500 could receive an annual match from the state for family contributions made to the accounts from 2008 through 2011.

"Preliminary evidence suggests that parental expectations and development of children, in some ways, are positively affected by Seed OK, regardless of whether parents have saved themselves," said Sherraden, noting mothers may view the savings accounts as their money even if they didn't make the initial deposit.

While the Oklahoma project is still being evaluated, Nevada has launched a similar program. The Nevada College Kick Start program provides nearly 3,000 incoming kindergarten students in 13 rural counties with a $50 initial deposit into a college savings account. Like the Seed for Oklahoma Kids program, the Nevada initiative is based upon CSD research.

Practical advice for parents

State initiatives may hold promise for better educational and financial outcomes for children, but Sherraden says it may be preferable for parents to open accounts on their own.

"Policies that aim to increase account ownership and savings may play an important role in college success," he says. "However, CSD research suggests that child development account initiatives that require accounts to be opened by parents -- as opposed to opening accounts automatically -- will favor advantaged children."

Although the Kansas research found benefits for any type of savings account, a recent CSD report indicates a dedicated college savings account is important to help children self-identify as college bound. This self-identity is a crucial component of why those with savings accounts tend to go on to college in great numbers, even if their account contains an insignificant amount of money.

While parents have many options when it comes to opening savings accounts, Bakke selected a local bank for his son.

"I chose to go with a savings account at a brick-and-mortar branch rather than an online account," said Bakke. "My son loves going there to make deposits and that experience has made him save more of his money."

Internet-savvy teens may appreciate the savings features of online banks, but either way, the takeaway for parents is simple: Open a savings account for your child today and they may reap unexpected benefits for years to come.