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Dipping Into Savings – 401k Kid Accounts

One of the core philosophies of our kids’ financial lives is the Share Save Spend strategy:  the first part of all income goes partially into giving, and partially into savings, before being allocated into a spending category.  What’s the point of putting monDippingintoSavingsey into savings, though?  Aren’t you just going to spend it all eventually?

Well, of course you’re going to spend it eventually.  You can’t take it with you, right?  For younger kids, this “eventually” is actually better when it arrives sooner rather than later.  Kids naturally have a short attention span, and it can get discouraging to be stuffing money into the bank for years without seeing it amount to anything good.  It’s better to encourage responsible savings and spending now, in order to reinforce the good habit of saving for later.

Truth be told, however, we have always hated seeing our kids drain their savings accounts.  They’d save up $100 to buy a bike, and POOF! It’s all gone.  It just didn’t seem quite right.  They were doing the right thing, working hard and saving their money for something they wanted.  But seeing that tiny balance in their savings account after the purchase was just so sad.

Then we hit upon (in my opinion) a brilliant idea:  we instituted the rule that you can only take HALF of your money out of savings.  Why?  Because the other half is going into your 401(k) account!

Here’s how it works:  Junior is saving for a new iPod.  He knows it’s going to cost $249.  To get there, he’s working extra jobs, saving 10% of his allowance, and saving his birthday money.  When he finally gets his savings account up to $500, he can take out $249 for the iPod, and put $249 into his retirement account.  In this way, he’s dipping into savings AND saving for later, at the same time.  Some parents will further incent this by offering a “match” on 401(k) contributions (just like a real employer) to help the 401(k) grow more rapidly.

This 401(k), of course, isn’t really a tax-deferred retirement account.  These accounts are only available to those with wages reported to the IRS.  Instead, these are 401k Kid accounts, which can be savings accounts, custodial checking accounts, or even brokerage accounts.  The purpose of this 401k Kid account isn’t so much to fund future retirement, though that is a noble goal.  We’ve positioned it for our kids as a “car fund” or a “college fund” or a “down payment for first house” fund – it will be a significant source of cash, available for a major purchase when most 18-20 year olds are starting life out by taking on debt.

Like many of the lessons we’re trying to teach the kids, this one strikes me as very rewarding for many adults (including me!)  We will often put off a major purchase, waiting to accumulate the cash we need to make it.  What if we waited a bit longer on each major purchase, and put that same amount into a retirement account at the same time?  This even works if you’re not living on cash:  Imagine what would happen if you went car shopping, with the intent that your ultimate monthly payment would be $220 per month to GMAC, and $220 per month to your IRA?  In the end, you’d make much more responsible purchasing decisions, and you’d wind up retiring either a lot earlier, or a lot richer.

Go ahead – dip into that savings!  But only take half, because the rest is funding your retirement.

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