Teaching your child to be a saver can be a tough challenge. Sure—you can open your child a savings account and teach them to diligently squirrel their pennies away. But savings accounts offer notoriously low-interests (even if they are currently above historic norms), and seeing those dollars sitting out of reach with little growth can be less than exciting. Plus, while dropping money is a good start, it doesn’t provide much rich, real life education when it comes to real savings.
There are other ways to teach a child to save money, whether it’s for a short-term goal such as a toy or the long-term such as saving for college or to buy a car. Here are a few to start with:
Match deposits. Asking a child to depart with physical money at a bank is difficult because other than a monthly paper statement, they won’t see what they have. But matching whatever they deposit at the bank with your own money is an easy incentive.
Craig Everett, an assistant professor of finance at Pepperdine University, matches each deposit made by his five children, dollar for dollar. A $1.50 deposit automatically becomes a $3 deposit. “An added bonus is that this is a good preparation for understanding their defined contribution plans [such as 401 (k) plans] when they grow up,” Everett says.
Show them the long-term benefits. Leading by example is one of the best ways parents can teach their children about personal finance.
Is your family planning a long vacation? Show your kids how much it costs and all of the effort needed to save for it. Involve the children in family savings plans and strategies, and monitor your savings progress together.
Teach the value of an emergency fund. This may be tough to do with a young child, but they should be able to understand that emergencies happen in life, and you need money to pay for them.
If your child has been saving for a car, encourage them to keep at least $1,000 in the bank for emergency repairs. Nothing teaches a 17-year-old the value of an emergency fund like the threat of a few weeks without wheels.
Go to work. Whether it’s a weekly allowance for doing household chores, or mowing the neighbor’s lawn, earning money can teach a kid the value of a dollar by having a dollar. They might be less likely to spend money on a whim if they realize how difficult it was to get that dollar in the first place. However much money they earn, require they save at least half of it. They’ll thank you later.
Show how compound interest works. This will be difficult with interest rates so low, but with some spare change it’s an easy lesson.
Marie Rie, a personal finance blogger, says she teaches her grandchildren—ages 8 and 5—about compound interest by starting with a dollar in a jar. Every day they add 50 percent interest to what is in the jar, with the older child figuring out the new interest to be added each day and the younger one putting the money in the jar. After a while, they count the money together and the kids split the money.
Shop wisely. Show children the value of a dollar by having them help you save money.
Maisie Knowles, founder of FreeShipping.org, says she asks her kids to look for the least expensive product on the shelf while grocery shopping. Knowles also recruits them to go through coupons and then find those products in the grocery store.
Help them invest. When Dave Gambrill’s sons—now ages 14, 12 and 7—were born, he started brokerage and DRIP accounts to help them learn about stocks. He actively talked to them about the accounts, even at a very young age. Gambrill matches all of the money his children put into stocks, as long as they do most of the research on the business themselves, he says.
They each now have $4,000 to $8,000 invested, and they’ve learned a lot about the companies they invest in, he says. His rule is that the direct investment plan investment is saved for their retirement, and is a way to show them the power of long-term investing.
If you really want to start small, get your kid a piggy bank. They will at least be able to collect change and keep it someplace safe, and can empty it out every once in a while and get a quick lesson in how to count money.