When parents start giving allowance we all dream of that moment when our kid says “Mom, will you put this in my college savings account? I want to prepare for the future” …no, just me? OK, well financial planners aside, I think it’s safe to say that we at least want our kids to not spend all of their money at one time on beef jerky.
How can parents teach their kids to save? As you know from my previous post, I’m a big fan of giving an allowance. Allowance can be a powerful, hands-on tool for kids to practice making saving and spending decisions without making expensive credit mistakes. It also takes you (as the parent) out of the role of having to hand out cash (or not) for your kid’s every request. With an allowance you can put that question back on your kid “sure, you can use your allowance for that.” You can read it to get the details on how we set up allowance in our house.
Here are some ways parents can teach their kids to save using allowance.
#1 Explain Short-Term Savings vs. Long-Term Savings, & Why You Need Both
Adults save in two broad categories - short term savings in cash, and long-term savings in stocks, bonds, REITs, etc. (If you need to brush up on stocks and bonds read this financial jargon-free post: What Is an Asset and How Can I Get One ).
Why do we save in different places? You might explain it to your kid this way - sometimes your little sister stuffs an entire roll of toilet paper down the toilet and we have to call a plumber. When little emergencies pop-up we have cash on hand to cover those unexpected expenses.
When explaining long-term savings you can talk about saving for college. Saving for college is a significant expense even for well-to-do families. It takes strategy, discipline and sacrifice to accumulate enough money to pay for even part of college. Talking about long-term savings will also allow you to introduce the concepts of stocks and bonds to your kids. If you need some help explaining stocks and bonds to your kids check out What Is an Asset and How Can I Get One.
#2 Offer a Cash Match on Long-Term Savings
I get it, saving is not something most people enjoy per se. Some do:
But for most people it takes serious discipline. People who have worked hard to save money and create a secure financial situation enjoy that peace of mind that comes with it. Yet, few people would say “Wow, saving that extra 10% last year was really fun!”
Kids have a hard time projecting themselves into the future. Heck, adults have a hard time thinking about their future. So entice your kids to save by offering a match on whatever they save. Think of it as a “kid 401(k).” You could use this opportunity to talk about how you save for retirement or big trips.
For older kids, I recommend you suggest they put a portion of it in their 529 account. This allows them a chance to take some ownership over their college costs. (If you want to talk to an older teen about college costs and student loan debt click here ) Just be sure they understand that this money can’t be accessed until they go to college.
If you are looking for a little more flexibility, then open up a low-cost custodial brokerage account. One thing to remember, once your kid turns 18 they can spend the money in a custodial account on whatever they want, so don’t make that your primary college savings account.This type of account could be a good place to save for a down payment on a car, study abroad or other opportunities that come their way.
#3 Open a “Real Account” at a bank or credit union
Some banks offer kids accounts with no fees and, if you’re lucky, a higher than average interest rate. If you do a quick “Google” search for “kids savings accounts” you can find some of these accounts in your area. Don’t forget to look into credit unions and local banks. They sometimes offer better rates on “kids” accounts.
#4 The Bank of Mom and Dad
I’ll be honest with you, I view giving an allowance as a way of shutting down the traditional “Bank of Mom and Dad.” Giving an allowance is an opportunity for your kid to learn to handle money, not for parents to extend credit to their kids. I no longer (completely) dread trips to big box stores with my kids because now they have some of their own money. I tell them to decide if they really want to spend their own money on it, and if they do we can come back in a few days and get it. This drastically cuts down on the amount of whining and begging.
In this scenario, I am suggesting that you open the Bank of Mom and Dad as a savings institution. You can allow your kids to bank their money with you while you pay an above average interest rate (you can divide an annual interest rate by 12 to figure out the monthly interest rate equivalent). You can help them keep a spreadsheet journal with a tally of their deposits and balances. Then you can calculate an interest payment on their savings at the end of the month. Or your teens can calculate their own interest.
If setting up an Excel spreadsheet to calculate daily (or monthly) interest is not your thing, then don’t worry, there’s an app for that. Or at least a website. Two to check out include mykidsbank.org and http://firstkidbank.com (both are free). I will note the First Kid Bank is still in Beta, but it looks pretty cool. These tools should not require any personal information about your kids. Be wary of any tools that require information about your kids to get started.
This might sound a little crazy, but I have to mention it because, according to Dr. Brad Klontz, it has happened: any money that belongs to your kid, belongs to your kid. So don’t borrow from the Bank of Mom and Dad to pay the pizza delivery man, or for anything else. Borrowing money from your kid breaks their trust and undermines their sense of security. If you want to hear some of the crazy ways parents undermine their children’s relationship with money and how early experiences may have shaped your relationship with money read Drs. Ted and Brad Klontz’s Mind Over Money.
If you are looking for a great book on how to encourage healthy financial habits and attitudes in kids, then I highly recommend Ron Leiber’s book The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous and Smart About Money. This engaging and thought-provoking book is written without financial jargon. After borrowing this book from the library I went out and bought it so I could have my own copy - I like it that much!
Encouraging good financial habits won’t happen overnight. Don’t be frustrated if your kids aren’t enticed into saving money by matches and high interest rates. Keep offering it to them and make sure they know they don’t need to put their entire allowance into savings. Just a part of it will do.
If your kid is highly resistant, then you may need to increase his or her allowance by a dollar or two and simply lay out that there will be more structure to their allowance going forward. Now a portion of their allowance will go into savings just like it will when they are grown up, and you will automatically match it. You might help them brainstorm something they want to save for. Then help them map out a plan to save that money so they can make that special purchase. As kids start to see their earnings grow, either through a parental match or interest, they will be more interested in saving.
How are you talking to your kids about saving? I would love to hear your tips in the comments below!
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