Evidence suggests that one’s ability and willingness to save is the greatest predictor of long-term wealth and ultimate financial independence. Therefore, it is never too early to teach your children to save. Now, this will not be an easy feat – after all, as human beings, we prefer instant gratification, especially children.
Many experts have weighed in on this subject and there are lots of opinions out there as to how you should go about teaching this lesson. Ultimately, you need to do what is right for you and your family. That being said, here are some suggestions to consider.
Consider giving your child a base allowance amount, no matter what. Payment is not dependent on them doing chores or getting good grades. The purpose is to teach them about money. You can then give them an opportunity to earn more than this base amount by taking on more responsibilities or meeting other objectives. How much money they receive is ultimately left up to them – it is their choice if they want to work hard to earn more money or they are content with just the base amount. But they will see that the two – hard work and more money – go hand in hand.
Regardless of how much your child is given or earns through their allowance, make it mandatory that they save at least 25% of it. For younger children, give them four quarters or 4 dimes and make them put one into a savings jar. For older children, consider offering to match whatever amount they save. Then, sit down each month and add up the savings. The kids will be amazed at the fortunes they amass!
Spend Some of that Savings
Once the children have accumulated some savings, give them permission to spend their money if they so choose and as they choose (subject of course to some restrictions). They will begin to see the value of a dollar and may think twice about making some purchases. For example, that video game that costs $25 – it took 5 weeks to save that much money – is the video game worth it? Perhaps the child will want to continue to save for something that is even more expensive. Either way, the children experience delayed gratification and see first-hand how it feels good to save now so they can spend at some future date. It will also show them how long it can take to save for a particular goal. They will begin to equate a value that they can understand with “things.”
Encourage Goal Setting
Another way to teach good money habits is to encourage goal setting – saving up enough money to buy something specific as compared to saving and then figuring out how the money will be spent later. My experience is that kids take better care of items that they buy with their own money. You may also find that kids think that they want something, but as time passes, whatever they initially wanted so badly becomes less appealing. Think of that Christmas present that he or she just had to have – you know the one that they haven’t touched since February?
Unfortunately, good money habits are not taught in school. It is up to parents and grandparents to teach their children these important lessons that can truly make a difference in their lives. If a child graduates from college knowing that they need to save 20% of their income, no matter what, think of what a head start he or she will have over someone who spends all they earn and doesn’t begin to try and save until well into their 30s or 40s, if they are ever even able to do so. It is never too young to start teaching your children the basics.