Teaching Children to Save

You've just won the lottery and have your choice of two grand prizes:  $1,000 an hour for 24 hours for 30 days or a penny doubled every day for 30 days.  Which would you pick?  If you understand the power of compound interest, you'd choose the penny.  The first prize would total $720,000, but the second prize would total a whopping $5,368,709.12!   

This is one example shared by the American Bankers Association’s Teach Children to Save® program that really hits home for most parents.  Sure, compound interest may be a little advanced for your third grader to grasp. But instilling the idea that if you invest a little for a long time you end up with a lot is generally more manageable. 

One of the toughest concepts to share with our children is to choose saving over spending.  I was talking with a parent who recently introduced an allowance into her five year old son’s life.  After finding success with task charts where the reward was a smiley-face sticker, she decided it was time to try a new approach.  The basic concept seems to be working.  He is eagerly making his bed and performing other duties as assigned.  However, the concept of long-term saving has yet to sink in.  After his first week, he received his allowance and promptly asked, “How many things do you think I can buy for a dollar, Mommy?”  Next on the agenda is coaching her little guy to see the value in setting a goal and saving his dollars to reach it.  

Like most things, developing good savings habits when you’re young is best.  Just like learning to ride a bike, many skills are easier to master when you're young than when you're an adult.  One of the best habits we can teach our children is how to budget.  The American Bankers Association put together these tried and true tips for beginning savers of ALL ages.  I personally admire this approach because it not only teaches good savings habits but also helps you educate your child about banking and philanthropy. 

Divide your money into four clear jars labeled:  Sharing, Spending, Short-term Saving and Long-term Saving.  The following guidelines will help you decide how much to put in each jar.

  1. Sharing jar:  deposit 10 percent of your income, or $1 for every $10. Is your child concerned about helping children or animals, or protecting the environment?  Help them choose a cause that interests them.
  2. Spending jar:  deposit 30 percent of your income, or $3 for every $10.This money can be used at any time for small purchases, like a baseball or a book.  Parents should provide guidelines on how the money can be spent and then allow the child to make his or her own decisions.  
  3. Short-term saving:  deposit 30 percent of your income, or $3 for every $10. You may need to save several months for larger purchases, such as a video game or an electronic device.   
  4. Long-term saving:  deposit 30 percent of your income, or $3 for every $10. This is where you'll save for the future.  Someday you'll want to go to college or buy a car.  These expenses require a lot of planning and saving! 

Once your child’s jars begin to accumulate, offer to help your child open a savings account at your local bank. Explain to them that the bank will keep the money safe and even pay to keep their money.  Many banks offer kids’ savings accounts with no minimum balance and no fees. 

Make a plan to take your child to donate the funds in their sharing jar.  Combine the donation with volunteer service around the holidays or in connection with a community event. Find something that the whole family can take part in. Your child will be immensely proud to give his or her donation, and your participation will reinforce the importance of what they have accomplished.