The banking industry isn’t making it easy to teach your child to be a saver. My son’s savings account earned less than a quarter in interest last year: $.20 to be exact. “Pathetic,” was his response. And he’s right.
But that started a family discussion about why we save and how to keep money safe, but earn more interest. The goal is to help kids develop money management habits now that will help them face credit cards, mortgages and credit scores later.
Teach Them To Save
The old advice I found everywhere, was to open a savings account once your child has $100. But why? With interest rates so low, there’s no financial reward for the child.
Dave Owen, in his terrific book, The First National Bank of Dad, suggests an alternative: Set up your own household bank. You can use Quicken or a spreadsheet. Your child gives you money and you record it on the spreadsheet. Anytime your child wants her money, you give it to her. What’s so great about that? The interest rate you pay. Make it high. Owen suggests about 5% a month. So now her $100 becomes $105 after one month and the next month, even if she doesn’t deposit anything, that initial $100 becomes $110.25. Pretty dramatic.
Teenagers: When you set up the bank, you should set up a sliding scale of interest. Otherwise, once your teen starts to earn money, you’ll be wiped out. But even 10% annually is a fantastic rate and should be a great incentive to save that hard-earned money.
Teach Them To Earn
Allowances are a line in the parenting sand. One camp ties allowances to chores (like in the real world). The other camp thinks that an allowance teaches a child about money management and chores are everyone’s responsibility so they shouldn’t be “for hire.”
We used something in the middle. We gave our kids allowances that were a little on the stingy side and didn’t tie them to chores— mostly because we were hopeless at keeping track. If they wanted or needed more money, then they had to earn it by doing a specific and bigger chore, like helping clean out the garage. Think of it this way, if you pay your child for making his bed, what are you going to do when he’s feeling flush and decides he’d rather forfeit the $1 you’re offering and leave it unmade?
If you use a household bank and set it up on Quicken, you can have it automatically add the allowance to the balance on a weekly or monthly basis. No more “Did you pay me last week?”
Teenagers: Once your child can earn money babysitting, caddying or shoveling snow, the allowance should end. At 12 or 13 your budding entrepreneur can probably think of many ways to earn a lot more than you were paying.
Teach Them To Spend
If you’re giving your child a great incentive to save through a more-than-generous interest rate on your household bank, then you don’t need to worry so much about the spending side of things. Your child will occasionally want to use her money for junk and you need to let her. But you’ll find when it’s her money, she’ll be much slower to spend than when it’s your money. And she’ll make some mistakes, which is fine. Regret is a great teacher.
Teenagers: Give your teen more responsibility for spending. Our teens buy their own clothes. They researched clothing prices and presented a clothing budget. We give them a credit card preloaded with money once a year and we no longer argue about Abercrombie versus Kohl’s. I still buy all “dress” clothes; since it’s important to me, I’m willing to pay.
Teach Them to Give
Another common piece of advice is to make your child give 10 percent to charity. But if you’re making them give, what are they learning?
Instead, talk about which charities you support and why. The best way to teach a child to be generous is to set a good example. According to Bev Bolson, director of Children’s Ministries at First Presbyterian Church of Wilmette, grade school children are aware of the world around them and want to make a difference.
“When the tsunami struck Southeast Asia, children were coming to me and asking if we could do something. So that month, all our children’s offering went to disaster relief,” she said.
Teach Them To Invest
When Alan Nadolna’s three children were 9, 13, and 15, he opened stock accounts for each child funded with a small amount of money. He helped them make their initial selections using a Peter Lynch philosophy: Buy what you know.
“My two older children had played the stock game at school, but they showed much more interest in these accounts because it was real money—their money,” said Nadolna, who is CEO of The Associates Group, a wealth management firm in Northbrook.
He’s been pleased that his three children research companies, regularly monitor their accounts, and even occasionally ask his advice.
Teach Them About Credit
Credit cards aren’t magic, but they can seem that way to a child. The plastic equivalent of a wand; with one wave, you can buy anything. But if we don’t teach our kids how to use a credit card, then it turns from a magic convenience to a curse. Nellie Mae reported that in 2008, college students who used credit cards owed an average of $4,138 when they graduated. And that’s just credit card debt.
Teenagers: Since many teens are heading to college with a credit card, it seems prudent to start good habits in high school. One resource is the Young Americans Center for Education, which offers a secured MasterCard for teens. The initial credit limit is $100 and the teen must have a savings account that covers the limit. It lets the teen purchase things over the internet and practice paying off a bill—in full—every month. For more information, see below.
Young Americans Center for Financial Education: http://www.yacenter.org
FDIC: Start Smart: Money Management for Teens
American Institute of Certified Public Accountants: 360 Degrees of Financial Literacy
Nellie Mae: Undergraduate Students and Debt
The First National Bank of Dad: A Foolproof Method for Teaching Your Child About Money by David Owen
The Kids Guide to Money Cent$ by Keltie Thomas