Raising Kids Who Save
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Raising Kids Who Save

Teach the value of money early, and help your child reap the benefits for years to come.

Start Early


When you tell your child she has to wait for her birthday before getting a new toy or computer game, she's not usually happy to hear it. When adults see something they want, they often dash out to make the purchase, even if they can't afford it. So it's no surprise that the idea of saving for a goal can be challenging for kids to grasp.

Challenging, but certainly not impossible. You can teach your kids to understand the value of saving, and if you try, there really can be a pot of gold at the end of the rainbow.

Money Lessons For The Ages

The first step is to help your child understand that goods and services cost money. How do you do that?

Your 5-to-8 Year-Old: When you go to the store, show your kids the price tags on items they want, whether it's their favorite snack or a new toy. Show them that some items cost more money than others, and have them help you at the check-out counter. At age 5, kids can start to identify cash money, such as quarters and nickels, or $1 bills and $5 bills. When you pay, show your child how you count your money, and how to count the change you receive from the cashier.

But where does that money come from? Your child may not think that money grows on trees, but she might think it just pops out of an ATM when you need it. Instead of only withdrawing money when you're with your kids, bring them with you when you deposit your paycheck or other checks, as well. You can discuss how you worked for the money you use to make purchases.

Now is a good time to help your child open her first savings account. Crack open the piggy bank and head to the bank. Your child will see that the money she sets aside in the bank will be available when she needs it. And when she wants to take money out, she'll understand she can only take out as much as she's put in.

Your 9-to-12 Year-Old: Kids in this group can start to understand more complicated money issues, such as debt.

Vern Hayden, a certified financial planner with Hayden Financial Group in Westport, Connecticut. and author of Getting An Investment Game Plan (John Wiley, 2003), tried an experiment when his daughter was 10. Hayden borrowed some money from her piggy bank at a 7 percent interest rate, simulating a bank loan. When he repaid her after a few weeks, with interest, she saw that her money grew. Though the interest only amounted to pennies, it was enough to make the point. She also learned that borrowing money costs money, and she didn't want to be the one who had to pay back more than she borrowed.

To show the importance of how debt can work against you, share your credit card statement with your child. Explain that a credit card is like an I.O.U. You don't hand over the plastic and get merchandise without a cost. When your credit card bill comes in, show your children the bill and explain the charges. Let your children watch you write checks as you pay your bills (whether you pay by hand or online) and explain where the money you're spending is coming from. If you're paying finance charges, use the discussion of your credit card bill as an opportunity to explain how costly those charges can be, and why you want to work to pay down outstanding credit card debt.

If your child is excited about the idea of earning interest, this is also a good time to explain about investing. Have your child pick a favorite food or toy. Then find out which company manufactures it. Explain to your child that she can buy a portion of that company by buying a share of stock, which represents ownership in the company. You can follow the company's progress together online or in newspaper stock tables and see how the release of new products or the company's performance impact the stock price.

Allowances

Once a child understands that the products you buy have a monetary value, take the next step. Give your child an allowance. And show him its value by encouraging choices about how to spend the money -- or save it.

Kids should get a regular allowance, says Steve Pomerantz, a certified financial planner based in Boca Raton, Florida and host of National Public Radio's "On The Money Radio." You can start when they're old enough to understand that items cost money -- around 4 or 5 years old.

Pomerantz says the amount should be age-appropriate -- enough for small short-term needs such as after-school candy, pizza or a movie, but not enough for more expensive purchases like a new electronic gadget. Giving smaller amounts encourages kids to save for the big-ticket items.

The amount of allowance is different for every family, depending on your income level and how much you can afford to give your child. Some experts suggest tying an allowance to household chores; others say managing an allowance is its own task that should not be confused with the completion of household duties.

Some Suggestions:

  • Ages 5 and 6: $5 a week
  • Ages 7 through 9: $8-10 a week
  • Ages 10 through 12: $10-12 a week

When you start giving an allowance, you have to start watching what goodies you buy for your child. If you usually buy whatever your child requests when you're on line at the grocery checkout counter, change your ways. Tell your child he can buy those items himself. Or, if it's an item you disapprove of, you can set rules about how he can spend his allowance.

Other Money Lessons

Kids of all ages can learn about the value of saving and careful spending.

  • Impulse Buying: "If they buy something on a whim, they may realize a couple of weeks later that if they had saved, they could have gotten something they wanted more," says Linda Homsey, a certified financial planner with Freya Financial Services based in Winchester, Massachusetts. Kids are kids, and they should enjoy the instant gratification of spending cold hard cash. But as they get into their teen years, they should have longer-range goals.
  • Don't Make It Too Easy: If you give an allowance that's too big, your child will be able to get everything he wants whenever he wants, without ever having to save, or think of the future, or ask for opportunities to earn money doing chores around the house. "If the goal is to buy a $200 PlayStation, you don't want to give $50 a week so they can get it in four weeks," says Pomerantz. "Maybe give $15 or $20 for a teen. It should be enough that they can spend some now and put some away for a long-term goal."
  • College Planning: Many parents feel strongly that their kids should contribute to the cost of their college education. You can encourage savings by setting up "pots" of money with your child. Of their allowance, a certain percentage can go into one pot for short-term spending and another percentage can go to a college pot.
  • Offer Incentives: You can offer incentives in the form of a matching contribution. Just as your employer may offer matching funds for your retirement savings plan, you can offer 25 cents or 50 cents for every dollar your teen saves towards college. Even if you want to be the one to pay for college, teens can save for related expenses, says Homsey. "At least earning their spending money is important," Homsey says. "They have a better feeling about themselves when they do contribute, even if it's just spending money for spring break."

 
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