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Comment by bradfa | Hacker News Reader

What’s wrong with bank accounts for your kids? Sorry, this one doesn’t seem to fit with your other examples.

If all you're doing with a bunch of cash over 18 years (!) is holding it in a bank account to collect interest, you're just losing money to inflation. Bank interest is almost nothing. Better to hold stocks, or at the very least bonds if you're extremely risk-averse.

Though this needs to be put in context - maybe you actually intend for the child to be permitted to spend the cash, in which case a bank account makes plenty of sense.

As the OP has "Aussie" in their name I think they'd be referring to the Commonwealth Bank of Australia Dollarmites accounts. They were shutdown recently after a watchdog investigation. It was locking kids into using the bank that would continue into adulthood and schools were getting paid to sign kids up.

https://www.morningstar.com.au/personal-finance/the-lessons-...

"They found that it provided little value for children and the largest outcome was that children were being exposed to ‘sophisticated’ marketing tactics."

Funnily enough the two people we heard that "advice" from were Brits and Saffas. It's just bad interest yields compounding over decades.

The banks might pay 3% interest, whereas even non-volatile conservative investments like cap notes or bonds would pay something like 7%.

Plugging it into a calculator:

1.03 ^ 18 = 1.70

1.07 ^ 18 = 3.37

Example numbers, but you're effectively taking half of the money that your kid would have had on their 18th birthday, and giving it to a banker.

3% is amazingly good. It’s not hard to beat that, but a savings account at a common bank can easily be below 0.05%.

I looked up BoA. 0.04%.

3% is becoming more common as of the last few years, at least in the US. I know several banks off the top of my head that offer 3.5% or higher (and more if you are a new customer) for their savings accounts. I would persuade people who use banks that haven't moved on from near-zero APY to move on themselves.

Yeah just off the top of my head I’d expect Discover and AmEx to be around 3.5%. Apple is at 3.4%.

I moved away from near 0% savings accounts more than 20 years ago, it’s amazing to me it’s still so common.

You don’t have to try very hard or go wrong to someone you’ve never heard of to get a good rate.

The rate goes up and down with inflation, high inflation, high interest - low inflation, low interest.

But even then, yes some banks still offer no or 0.5% accounts.. because they can, and many people can't be bothered to figure out a better option, or "trust" there bank and don't want to move. (or the bank has high interest account, but make it complicated to use)

When I first got a real high rate savings account it was 5%. I think my normal bank paid an incredible 0.05% at the time.

You’re right it varies and that has been obvious lately as I seem to be getting monthly email warning me my rate would be going down.

FWIW, savings rates have been coming down.

Most annoying on Reddit are people who write about "high yield savings accounts", those might have been there in 80's or 90's but I see right away those people are just LARPINg.

3% is nothing there are no "high yield savings accounts".

It’s still better than basically 0%.

Yeah they’re not going make you rich. It doesn’t take the place of investing. But its still better than a checking account for money you need to keep liquid.

I’ve been thinking about moving some money over by selling some shares and opening up a savings account with enough money to make a difference.

I'm definitely at the point where, if not sticking money in my mattress, I'm keeping a lot in pretty safe investments. Did sort of an equity housecleaning a couple years back and consolidated some investments, in part to make them easier to track and manage.

3% is typical for a HYSA (Ally, for example)

3% is roughly inflation.

Yes… I also wouldn’t park money in a savings account for 18 years.

But 7% is not the risk free rate! The S&P and these other things have risk!

But show me a bond I can buy that’s paying 7% and I’ll show you below investment grade.

LFSPA.

Not risk free, but not volatile either. Although even that underperforms compared to an index fund.

Index funds are not risk free! We have had a solid 15 years and everyone forgot that there are decades of declines or stagnation.

LFSPA is a cap note, not an index fund. Hence the lower returns, haha.

Not saying it's necessarily the ideal vehicle but anything beats the banks.

Australian and New Zealand private small business and consumer lending?

while you’re at it maybe pick up some Indian bonds which have a high coupon close to 8%?

That's why you hedge with Bogleheads three headed fund. Bonds are strong when the indexes are weak according to them

The anti-correlation between bonds and equities hasn’t been a thing for decades. That is advice that passed its sell-by date a while ago.

The modern version is to go hard into equities and out-grow the drawdown risks. You still want a couple years of burn in treasuries but that is strictly a buffer against adverse returns. By the time you retire, the treasury fraction is a tiny fraction of the total by virtue of the equity growth rate.

I don’t have any reason to think that international economies are not correlated to the US. But also I don’t expect them to be that successful. Europe and South-east Asia have a mafia like relationship with their established businesses and regulate away new ones.

The sibling comment addresses bond funds.

ZIRP, 2008, Covid, trump, big tech, and AI all came after Boyle.

I would happily have a decade of declines or stagnation on the 10's of 1,000s in the kids account over the next 20 years - they can then invest in their productive earning years in companies trading at p/e's of 10 again.

You’re not giving it to a banker, you’re trading risk for return and flexibility. One can access savings at any time, any amount. Not true with bonds, maybe if you fiddle with indices.

Also bond returns have averaged 5% over decades, not 7.

Not taking all this into account, and simply claiming bogey men took your money, is misleading.

While true, funds for retirement, college or to give as a gift when your kids move out do not need liquidity. Therefore, those should not be in savings.

Truly conservative investments are more in the 3-4% range these days; money markets were running around 5% a few years back but they've come down. I have some bonds (including treasuries) that are higher than that but I bought them quite a while back. For long time horizons I'd be more weighted on equity indexes and maybe dividend-heavy stocks.

I am curious. When you put this money in kids names, do they (or we) get taxed on this? If we save on taxes, then for a person (or their child) with high income and high state taxes, the benefit of the 3% may be larger than it appears to be. Of course, up to a limit.

Depends on jurisdiction, I'm sure.

In the US, kids taxes can be separate, but after a small exemption, they pay the parents rate on unearned income (investments, interest, etc). You have to have a pretty big balance before 3% apy gets past the exemption though.

From a return on investment perspective, it is not great.

Bank accounts are convenient and safe, but you pay the price with low interest rates. But if you don't intend to touch that money for 18 years, you don't need the ability to withdraw at any time without losing money that a bank account offers, so why pay the price for it?

However, it has symbolic and educative value, teaches the value of saving, how interest works without going into the complexities of the financial system, and making it clear to your kids that it is their money, even if they can't touch it yet. So it may be a good thing for that reason, when the sums are reasonable.

You should invest in different things depending on your age.

An old person might want to have more of their money in yielding assets. They are withdrawing from the account so the certainty of having predictable value might outweigh the inflation risk.

Savings intended for a young child should be allocated almost entirely into equities. They are not affected by drawdowns since they won't be withdrawing from the account for a decade or two, but inflation is a primary concern.

A bank account is a particularly bad place to put savings intended for a child long-term. A good high yielding account might barely keep pace with inflation, but it's unlikely to grow much in real terms. The average bank account will lose money in real terms in that 10-20 years.

Bank account interest is pretty much always less than inflation. So, money sitting in a bank account for 18 years is just losing value.

The object of the game is to live within your means, save and invest. More than half the population does not do that. When you’re 18 the treadmill starts turning if you don’t use your time wisely, you’re going to be in trouble at the end of life. When you are young, simple compounding is your friend because you have time.

https://www.thewealthminded.com/finance-basics/how-compound-...

People have won the lottery and blown it all, some people who have extremely high paying professions in their youth, have over the course of time have also blown it all.

While banks often pay crap rates, real rates (e.g. from government bonds) have largely been positive (except the short end after GFC and COVID).

https://fred.stlouisfed.org/series/REAINTRATREARAT10Y

https://fred.stlouisfed.org/series/REAINTRATREARAT1YE

Not OP, but I think they are referring to the fact that you can get tax advantaged accounts instead of a standard savings account. Not to mention the interest rate on those accounts is basically a rounding error.

A child can not get a tax advantaged account. You need earned income to contribute to those.

If you track chores you can actually set up your kids with a Roth 401k. For example, this company takes care of it for you https://www.halfmore.co/

No. You can not consider payment for chores as earned income.

Inflation over a long time horizon is about 3%. Especially if it's going to be a decade or more, just put it in an index fund.

The interest rate is very low.

My checking account isn’t the best out there at 1%. Same with my savings account at 3.4%.

Neither of those is anywhere near inflation. You are effectively losing money by parking it there.

Most checking accounts don’t pay interest at all. I looked up Bank of America's savings account: 0.04%.

You read that right. Effectively zero. And it’s a flat rate. Whether you have $10 or $10 million in there.

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