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Introducing Children to Smart Saving

Saving money for a rainy day isn’t necessarily instinctive. It’s a learned behavior that most of us picked up from our parents. Sometimes we can’t even explain how we learned to save money, so how can we impress the merits of savings on our own children?

One thing is certain – it’s not going to be by accident. Hoping your kids learn to appreciate the value of savings is much less effective than teaching them smart savings skills from a young age. By starting your children’s financial education early, you will be able to help them stay out of debt, avoid financial troubles, and build up a nest egg against future uncertainty.

Savings Starts At Home

Just like many other childhood lessons, saving skills start at home with the model set forth by the parent.

Children are natural mimickers, especially when they are small. They are watching your every move for clues about what they are supposed to be doing. Rather than keeping your financial choices hidden, be open with your kids about what you are doing to save money. Let them see you actively saving, either by putting money in a special piggy bank in front of them, setting money aside and then taking it to a bank, or visiting precious metals dealers.

This approach works best when you and your spouse or partner are on the same page. Get things sorted out between yourselves first, so that you are presenting a unified front to your children. It can be a challenge, but watching your children develop a savings instinct is worth it.

Teaching the Value of Money

Smart saving is easier when children understand the value of money. You can’t just tell a kid that money has value; they need to get this experience for themselves. As children get older, help them find jobs or chores around the house that they can do for extra cash. If you are giving an allowance, help them understand what it represents in terms of time to earn, and that if it’s wasted, it’s gone.

For many families, a system that works well is a chore chart or task based “allowance” of age-appropriate tasks. Kids can learn that a trip to the movies is three hours of yard cleaning, or that if they want a certain toy they will need to work extra to get it.

Try to stick to a system where children have to save up for what they want, rather than allowing “advances” on allowance work. This helps avoid impulsive over-commitments, and helps train your kids to rely on their own earning abilities to save instead of constantly turning to the Bank of Mom & Dad for small loans. By forcing kids to adhere to a save ahead model, they can start learning responsible adult thought patterns for sound financial management.

Compounding & Interest & Debt

Many past lessons on savings for children focused on teaching them the benefits of compound interest over time, so that the money they put away as a 10 year old will really turn into a college fun. That worked when interest rates were positive, but in the current climate, these lessons are no longer as useful. After all, a small child’s savings account with a .025% annual interest compounded over time amounts to pocket change even after many years, and that’s hardly a savings motivator.

A better discussion to have around savings is how it helps avoid debt and the harsh compounding interest rates that go with it. Credit card rates and fees are a downward spiral for many young people just starting out, and children who have been taught the value of saving over borrowing on credit can avoid this problem. Children may not understand how a .025% interest rate will help them, but they can certainly get how 16.99% interest rate will hurt them over time.

Role play scenarios with your children, especially as they get older and start working outside of the home. Ask “What do you think?” and “What would you do?” to help open discussions about smart spending and saving throughout your scenario plays. Help them understand how having cash on hand in a savings account or home store of money will help them avoid debt emergencies and interest penalties.

Final Thoughts

Saving money for a rainy day isn’t necessarily instinctive behavior, but it can be taught. Spend time with your children so that they understand the value of saving. Model good saving behavior, help them learn the value of money, and work with them to explain interest rates and debt issues. At the end of the day, you’ll have financially savvy children who can make good savings choices for themselves.

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