The Best Ways to Save Money for Your Grandchildren (Without Going Broke Yourself)

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

You've watched your children grow from their first steps to building lives of their own. And then a new chapter begins to unfold as grandchildren enter the picture. There’s nothing like getting that long-awaited text or phone call to hear the amazing news, “Baby’s born, and mom is doing well!” Becoming a grandparent can change your perspective on money. Suddenly, you're thinking about not just your own future or your children's future—but also about the next generation.

Whether it's buying birthday gifts, helping cover sports club fees or music/dance lessons, paying for family vacations, contributing to college savings, or building a meaningful inheritance, the desire to support grandchildren is natural. But it can also become expensive. Among the 96 percent of U.S. grandparents who help out, the average yearly spending on their grandchildren is $3,917, according to TheSeniorList's 2025 Grandparent Spending Report.

The challenge is finding the right balance. You want to help your grandchildren enjoy opportunities and build a strong financial foundation without putting your own retirement or financial security at risk.

The good news is that with a little planning (and some willpower), you can do both.

How to audit what you're spending on grandchildren today

Before deciding how to save or invest for your grandchildren, it's worth understanding what you may already be spending.

Many grandparents underestimate how much money goes toward their grandkids because the expenses are spread throughout the year: a toy here, a trip to the zoo there. Back-to-school shopping. Summer camp. Sports fees. Holiday gifts.

Over time, those "small" purchases can add up to a meaningful amount.

A good exercise is to track grandchild-related expenses for 60 to 90 days and categorize them into buckets, such as these:

• Gifts and holidays
• Childcare
• Travel and vacations
• Clothing and essentials
• Education expenses
• Extracurricular activities
• Healthcare expenses
• Savings and investments

Once you've identified where your money is going, separate expenses into two categories:

Essential support

These are expenses that fill a real need, such as helping with childcare, medical costs, or educational expenses.

Discretionary spending

These are optional purchases, such as extra toys, entertainment, or impulse gifts.

The goal isn't to stop spending on your grandchildren. It's to make sure your spending aligns with your priorities and long-term financial plan.

If you're not already working from a budget, creating one can help ensure you're supporting your family while continuing to save for your own future.

What are the best ways to save money and invest for grandchildren?

Generally, the best investment options share some combination of these qualities:

• Tax advantages
• Long-term growth potential
• Low maintenance
• Appropriate risk levels
• Flexibility
• Strong custodial or estate-planning protections

Here are some of the most common ways you can save for your grandchildren's future.

High-yield savings accounts, TIPS, and CDs

If your primary goal is preserving money rather than maximizing growth, a high-yield savings account can be a good starting point.

These accounts typically offer higher interest rates than traditional savings accounts while maintaining easy access to funds.

Savings bonds and Treasury Inflation-Protected Securities (TIPS) are other relatively conservative options that may fit grandparents who prioritize safety over growth.

certificates of deposit (CDs) can be a safe option for money you plan to spend relatively soon. They may offer better rates than high-yield accounts in exchange for locking money away for a fixed period, but growth may struggle to keep pace with inflation over longer time periods.

529 College Savings Plans

For many families, a 529 plan is one of the best ways to save money for a grandchild. These accounts are specifically designed to help families save for education expenses.

Contributions grow tax-deferred, and qualified withdrawals are generally tax-free when used for eligible education expenses.

Key benefits include:

• Potential tax advantages,
• Long investment time horizons,
• Professionally managed investment options,
• High contribution limits, and
• Flexibility to change beneficiaries among qualifying family members.

Recent rule changes have also created opportunities under certain conditions to roll unused 529 assets into a Roth IRA for the beneficiary. This gives you some options if your grandchild gets a full scholarship or education costs end up being lower than expected.

You could set up a 529 or contribute to one that another family member already opened. Either way, it’s one of the most common ways to put money away to help out your grandchildren.

530A/Trump accounts

A newer option that has emerged is 530A or Trump accounts. Only one can be opened per child, and they have a smaller annual contribution limit of $5,000, which can be provided by multiple people, including grandparents, without filing a gift tax return.

The money is locked until January 1 of the year the child turns 18, at which point it converts to what is essentially a traditional IRA. From there withdrawals are tax-free if used for higher education, buying a home, or growing a family, within set limits.

UGMA and UTMA custodial accounts

Custodial accounts allow adults to invest money on behalf of a minor. These accounts are governed through the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), depending on the state.

As a grandparent, you could be the custodian until the child reaches the age of majority, at which point control transfers to the beneficiary. You could also designate a parent as the custodian—or even start as the custodian and eventually transfer that responsibility to a parent.

Benefits can include:

• Broad investment flexibility,
• No education-use restrictions,
• Relatively simple setup, and
• Opportunity for long-term growth.

One important consideration is that once the child reaches adulthood, the assets automatically become theirs to use as they choose. You could end up feeling a little disappointed in how the money is spent.

For grandparents who want flexibility but are comfortable eventually giving full control to the grandchild, custodial accounts can work well.

Custodial Roth IRAs

A custodial Roth IRA can be one of the most powerful long-term savings vehicles for your grandchild—but only if they have earned income. For example, a teenager who is on payroll—beyond babysitting or lawn mowing—may be eligible to contribute to a Roth IRA.

Because retirement savings can compound over decades, you can advise grandkids that even relatively small contributions made at a young age may have significant long-term growth.

Advantages can include:

• Tax-free growth potential,
• Tax-free qualified withdrawals in retirement,
• An extremely long investment time horizon, and
• The opportunity to teach financial literacy early.

The earned income requirement means this strategy works only for older grandchildren rather than youngsters.

Whole life insurance

Life insurance may also play a role in your legacy strategy. Grandparents sometimes use life insurance in two ways:

Using your own policy as part of a legacy plan

An existing permanent life insurance policy with you as the insured can provide a death benefit to beneficiaries. You may be able to change the beneficiary to send some (or all) of the proceeds to your grandchildren. It’s an efficient way to pass wealth to future generations.

Depending on the policy structure, cash value may be accessible during your lifetime and can become part of a broader wealth-transfer strategy. This method allows you to see the money help your grandkids while you’re still alive—but it reduces the overall death benefit.

Funding a policy for a grandchild

Some grandparents purchase permanent life insurance for grandchildren while they're young to give them a financial headstart. This can lock in insurability, offer lifelong coverage, and provide a safe place for children to build cash value they can use as they become adults. It also sets guaranteed premiums while the child is relatively healthy—the healthier an insured person is, the less expensive the premiums will typically be. As with any insurance strategy, it's important to understand policy costs, benefits, and your long-term objectives before moving forward.

Trusts

Trusts can be useful if you want more control over how and when money is distributed.

Unlike a custodial account, where assets eventually become the grandchild's property outright, a trust allows the grantor to establish rules governing distributions. The various types of trust can also be used for different purposes, like supporting a grandchild with special needs or disbursing assets when certain conditions are met.

For example, a trust might:

• Release money at certain ages.
• Limit the funds accessible within a set time period to prevent overspending.
• Fund education expenses.
• Support healthcare costs.
• Provide long-term wealth management guidance.

Trusts can be particularly valuable for larger estates or for grandparents who want to create multigenerational wealth-transfer plans.

Because trusts involve legal and tax considerations, it's typically wise to work with an estate-planning professional.

Paying expenses directly

Sometimes the simplest solution is also one of the most effective.

Instead of giving cash, you may choose to pay specific expenses such as these directly:

• Tuition
• Medical bills
• Childcare expenses
• Summer camps
• Sports fees
• Music or dance lessons

Direct payments can ensure funds are used for their intended purpose and may offer tax advantages compared with making unrestricted gifts.

This approach can be especially helpful if you want to help right away without creating an additional account or long-term investment strategy.

Common mistakes grandparents should avoid

While it feels natural and is often rewarding to support your grandchildren, watch out for these common pitfalls.

Putting your own retirement at risk

Perhaps the biggest mistake grandparents make is prioritizing their grandchildren's needs over their own financial security.

Remember: Your grandchildren may be able to borrow money for college. You can't borrow money for retirement.

Before making significant gifts or investments, make sure your:

• Retirement income plan is sustainable.
• Emergency fund is adequately funded.
• Debt is manageable.
• Healthcare costs are accounted for.

Helping others financially is much easier when your own foundation is secure.

Withdrawing too much from retirement accounts

More than one in 10 grandparents have dipped into their retirement savings to help their grandchildren, according to TheSeniorList study. But pulling money from retirement accounts to help family members can have unintended consequences.

Not only could you reduce future growth potential, but you may also trigger taxes, penalties, or higher future withdrawal requirements depending on the account type and your age.

Before tapping retirement assets, consider whether another funding source may be more appropriate. And remember that your legacy is larger than actual gifts. Those whose lives you’ve touched will remember you by the time you’ve spent with them and the wisdom you’ve shared.

Co-signing loans

Co-signing a loan may seem like a simple way to help family, but it creates real financial risk. If the primary borrower misses payments or defaults, you could become responsible for the debt. Your credit score could also be affected.

It's important to fully understand the risks and think through the “what ifs” before agreeing to co-sign any loan.

Focusing only on immediate gifts instead of long-term planning

While toys, vacations, and experiences create wonderful memories, a long-term financial strategy may provide an even bigger benefit.

Saving consistently for education, investing for future goals, creating an estate plan, or building generational wealth can have a lasting impact that extends far beyond a birthday or holiday. Even teaching young people how to use credit cards responsibly or the difference between good debt and bad debt can be a huge benefit.

Support your grandchildren, but don’t forget your retirement

The best way to save for a grandchild isn't necessarily the account with the highest rate of return. It's the strategy that supports your grandchildren while protecting your own financial future.

For some grandparents, that may mean opening a 529 plan. For others, a custodial account, trust, life insurance strategy, or direct payment approach may make more sense. Your Northwestern Mutual financial advisor can help you evaluate the options.

Whatever path you choose, start with a clear understanding of your budget, your retirement goals, and the legacy you hope to leave behind.

Supporting your grandchildren can be one of life's greatest joys. The key is making sure that generosity strengthens—not strains—your long-term financial well-being.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization's initial and ongoing certification requirements to use the certification marks.

No investment strategy can assure a profit and does not protect against loss in declining markets. All investments carry some level of risk, including loss of principal invested.

Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.

Frequently Asked Questions

How much do grandparents spend each year on their grandchildren?

According to TheSeniorList's 2025 Grandparent Spending Report, 96 percent of grandparents provide financial support to their grandchildren, and those who do spend an average of $3,917 per year. Collectively, U.S. grandparents contribute an estimated $238 billion annually to help cover everything from everyday necessities education.

What is a breakdown of common grandparent expenses?

Grandparent spending extends well beyond occasional treats. TheSeniorList found that support commonly includes gifts for special occasions (80 percent of respondents), buying clothes or shoes (62 percent), entertainment purchases like toys or movies (58 percent), paying for meals out (56 percent), and paying for vacations (24 percent). We recommend that you only contribute what you can afford versus comparing to other families.

The report also notes that some grandparents help with larger expenses such as rent, mortgage payments, or education costs, with 22 percent contributing to college savings or college funds—reflecting the growing role they play in family finances.

How can I open a 529 college savings plan for a grandchild?

A grandparent can open a 529 plan by selecting a state-sponsored plan, naming themselves as the account owner and their grandchild as the beneficiary, choosing an investment option, and making an initial contribution. You can typically take all the steps online, as long as you have details like the legal name, date of birth, and SSN or TIN for your grandchild.

As the account owner, you’ll have control of the assets while the money grows tax-deferred. It can generally be withdrawn tax-free when used for qualified education expenses.