Small-dollar savings lead to big rewards: What Michigan can learn from the UK’s Child Trust Fund

Small-dollar savings lead to big rewards: What Michigan can learn from the UK’s Child Trust Fund

By Brian Rakovitis, manager of financial empowerment initiatives

Nearly two decades ago the United Kingdom government decided to invest in its future (and its youth) by opening savings accounts for every child before their first birthday. As Michigan communities pursue similar initiatives, this program provides further evidence for what we already know: small-dollar savings lead to big rewards.

Initiated in 2002, the Child Trust Fund has granted every child born a government voucher worth £250-500 ($330-670) to invest in a tax-free account. Today is the first day British teens turning 18 can cash out their funds. Depending on how the money was invested, their accounts may be worth as much as £70,000 ($94,000); however, even those that have remained untouched since the initial investment are worth about £1,500 ($2,000). 

While the average account balance is modest, research indicates even minimal savings deliver a broad range of economic, social, and health benefits—including increased household financial stability and greater resiliency to financial shocks. Small-dollars, when invested early, provide young adults with a financial bedrock for success, helping unlock their full potential. 

In the United States, we have similar state-run (529) and community-run (Children’s Savings Accounts) programs designed to encourage savings dedicated to postsecondary educational expenses. 529 programs offer an investment strategy with a competitive rate of return. Children’s Savings Accounts (CSA) offer students an initial deposit and incentives to help all students, regardless of household income, grow their account balance. Both programs offer a significant return on investment with low upfront costs.

Between 2004-2008, communities across the US, including Pontiac, MI, hosted Saving for Education, Entrepreneurship, and Downpayment (SEED) demonstration projects. Closely mimicking the Child Trust Fund, low-income youth received a 529 account with an initial deposit; the accounts were invested and grew over time. Children with these accounts have just begun attending college in Michigan, and, even during a decade of major economic hardship, a recent study found 91% of account holders did not withdraw from their accounts early

Michigan communities boast an impressive track record of developing youth savings and investment programs. With 14 CSA programs, more than 18,000 students enrolled, and a well-established 529 program, these savings options offer a glimpse into what a statewide Child Trust Fund could look like in Michigan. Consider the economic and social benefits Michiganders would reap if they all begin adulthood with a nest egg. A statewide program would invest in Michigan’s future by giving its youth the kickstart they need to succeed. 

To learn more about Children’s Savings Accounts, contact Brian Rakovitis.