If you're thinking of opening a term deposit account for your child (or, indeed, one for each of your offspring), then you're making a really good decision. Term deposit accounts will allow your children to earn an attractive rate of interest for several years, sometimes until adulthood.
Opening a kid's savings accounts also teaches your children an important life lesson--how to save money and how compound interest works. You may already have a savings account for your child, but you need to look at the advantages of a term deposit versus a savings account so you really understand what you're doing.
Looking for a good term deposit for your children
The best place to start is with the bank you use for most of your accounts and services, but it shouldn't be the only place you look as you never know what's out there. You need to see what offerings your current provider has and then compare these to all the others on the market before settling on the best available option.
Are there any special rules for term deposits for children?
When it comes to a child's term deposit, banks have different rules and criteria. Some have a minimum age of 12, some 15 ,and others even offer you a baby savings account for serious forward-planning. As long as the child is under 18 years of age at the time the account is opened, it's fine. Although, if Junior's 18th birthday is nigh then it makes more sense to wait for a grown-up account.
What are the benefits of term deposit accounts for children?
Why not just open a regular savings account and use that for the foreseeable? Because there are particular advantages to using term deposits, no matter the age of the account holder. For children, however, they're a particularly good idea simply because time is on their side.
Term deposits offer guaranteed returns
Term deposits allow you (or your child) to invest their money at a set, fixed interest rate, so you know exactly how much their money will have grown by the end of the term. The interest rates can't dip (admittedly, they can't rise either, but sometimes you just want that certainty), so you can plan ahead for things like that first car or a gap year.
Your child can't get to their money easily
Once children get to a certain age, they'll be tempted to chip away at their savings for a new phone, or a clothes-buying spree, so having the funds locked away helps to prevent this. Of course, if there's an emergency you can get to the money, but you'll probably pay a fee.
Your child will learn about saving up
If you check the balance of the account every quarter or so, your child will see how their money is increasing simply because of compound interest. Find out how much interest you could earn using our compound interest calculator. They don't have to wash any extra cars or walk the neighbour's dog their pile is growing as if by magic!
They also learn to be patient
Whether they plan to save enough to buy driving lessons or to pay down a chunk of their HECS/HELP debt, sitting patiently until their balance reaches that target teaches your child how to defer gratification and restrain their impulses.
There are probably no fees
Most term deposits don't charge any management fees, so the balance grows as quickly as possible. In fact make sure your term deposit has no fees. If you make an early withdrawal you'll probably be penalised by forgoing some of the interest payable, but even this can be a lesson.
You get security
If you use an authorised deposit-taking institution for your term deposit the Australian Government Guarantee Scheme covers you for up to $250,000, so there's very little risk of your child losing the money.
What to look for when you're choosing a child's term deposit
You need to spend a little bit of time comparing children's term deposit accounts before deciding which one suits you best. Here's what you need to look at.
The interest rate
This is the most important factor to look at, as it determines how much your child's savings will grow. Remember that it'll stay at that rate for the duration, even if the base rate comes up, so look for the highest rate for the term you want.
What's the minimum age requirement?
Each provider has different minimum ages for its various products, with some banks having no minimum and others needing the account holder to be aged 16 or over.
Look at the minimum and maximum deposits
Some accounts have a minimum opening balance, very often $1,000. Others have a maximum deposit, so choose an account that's going to suit the amounts you have available to put into it.
Check the term lengths
The terms can range from seven days to five years, but not all banks offer the same term lengths. You should have an idea of how long you want to invest the money for, but you also need to look at the interest rates as longer terms usually carry better rates.
How often the interest is calculated?
Ideally you want an account which calculates the interest daily so there's more chance for the interest to compound itself, giving better returns at term.
What happens at maturity?
You usually have a few options for when the term ends. The money could be transferred into an at-call account, or it could simply roll over into a new term deposit. You may be able to choose a new account with a different interest rate then.
Early access arrangements
You need to find out what happens if you make an early withdrawal, as most accounts will impose a fee or a penalty on any interest earned, or even both.
What happens when junior turns 18?
When the account holder turns 18, some term deposit accounts start to levy tax, or they may change the interest rate, so you need to find out what happens so you don't get any unpleasant surprises.
Compare term deposits from all of Australia's major banks, credit unions and building societies here.