Savings, Part 1: Teaching Kids to Automate their Savings
In our last four posts, we’ve focused on how you can teach your child about debt, in age-appropriate terms. The idea is to begin introducing these financial concepts early and to build on them as your child grows. In our 4-part series on teaching kids about debt, we covered:
Introducing the concept of an IOU in Teaching Your Child About Debt,
Building a foundational understanding without the risk of credit in Introducing the Debit Card to Your Child,
Explaining the Difference Between Debit and Credit Cards to Your Kids, and
Tackling the complex idea of various types of debt in simple terms in How to Explain the Different Kinds of Debt to Your Kids
Now we’re going to switch gears and return to the concept of saving. If you haven’t read our earlier posts, check out Establishing a Family Economy, in which we discuss setting up a “family bank,” and Teaching Children How and Why It’s Important to Save Money, which introduces basic, early savings precepts you can teach your kids.
Creating saving habits early will help your child reap the lifelong rewards that come with a saving and investing mentality. By establishing the family bank concept, my parents helped reinforce the ideas they wanted us to absorb about finances:
First, we earn money,
then we save money, and
then we spend money.
For me, a critical part of grasping this concept was writing my deposits and withdrawals in the ledger. By doing it myself and doing the calculations, I could see both my deposits and my interest (my parents physically gave us the cash “interest.”) It was very encouraging to see my savings grow in that way.
Of course, every child is different. My younger sister loved to spend; I loved the feeling of having more money that she did! If you have more than one child, seeing how their siblings save and spend can add another element to your lessons.
Automate It
Because I liked seeing my money grow, I realized early that the more regularly I made deposits, the more quickly my money would accumulate. It became an automatic habit for me to deposit most of my allowance upon receipt. It was an early lesson in “set it and forget it.” Even today, that’s a basic premise of my investing strategy.
If you decide to give your child an allowance, talk about saving part of that money first, before buying anything, so that she’ll have more money for a bigger purchase later. It can be helpful, for some kids, to identify a “purchase goal”—something she’d like to buy but is a
bit pricey and she’ll need to save for. Seeing her savings get closer to that target number can be a strong incentive to keep saving.
Once your child gets a little older and earns a paycheck, that habit should be firmly established. If it’s not, reinforce the idea that compound interest adds up and is critical to growing any type of wealth. Encourage her to choose an amount to set aside right off the bat -- $25, $50, $100 – whatever amount is “doable” for her will work. The idea in the beginning is simply to set the habit.
Once she’s decided on an amount, show your daughter how she can have her bank automatically move that amount from her checking account on certain dates (pay days) and put it into a high-yield savings account or an investment account.
The money that remains in the checking account is the “spendable” money for the month.
These habits are easier to instill in some children than others. Delayed gratification can be tough, so if your child struggles to save, make the savings goal small, so she can feel successful with saving it. At a young age, it’s not about accumulating wealth; it’s about creating a lifelong habit. She may blow through all of her money a few times, but learning that lesson in her youth can save her financial heartache in the long run.
Summary Points
Establishing a family economy can give kids an early start in saving and understanding the benefits of compound interest.
Help your child understand the concept of paying herself first and why that’s a good idea.
There are many ways to help your child build good financial habits. A few suggestions:
Have your child set a goal for saving. Depending on the child, it could simply be that she wants to have a certain amount in the bank (choose a number) or she could be saving for a special purchase.
Pay interest in your family economy.
Encourage your child to pay herself (her savings) before she spends money elsewhere.
Understand what motivates your child, and then have your child set a goal for savings based on that motivation. It could simply be that she wants to have a certain amount in the bank or she could be saving for a special purchase. Either is fine – use what works for each child!
Most importantly, just begin. Start teaching, modeling, and reinforcing these lessons as early as you can. Your children aren’t likely to learn them elsewhere and good savings habits will pay dividends for a lifetime.