Teaching Kids to Save Money

401k-piggySo you’ve been teaching your kids to save money: what do you do when they want to take money out of savings?  There’s a couple of key issues here:

  • What should they be able to spend savings on?
  • How much should they be able to take out of savings?
  • How will they ever accumulate savings, if they’re spending their savings?

We’ve come up with a plan that addresses all of these, and I’ll share the details below.  But first, a bit of background.

Teaching kids how to save is tricky.  Particularly with young kids.  They have a really, really short attention span.  Getting a five-year-old to save up for a whole year is a losing proposition.  When kids are first learning to save, they should be saving for a couple of days or weeks.  Once they get the idea and are comfortable saving, they should start working on saving toward goals that will take months to reach.  Only when they’re “expert” at setting goals and saving toward them should they take on a multi-year savings plan.

The point is, kid learn how to save, by saving – so…

Teaching Kids to Save Money

Kids should always have a goal that they’re saving up for.  They should always have an idea of what they’re going to spend their savings on, to keep them motivated to save.  If they’re not saving, they won’t learn how to save.  And if they’re not spending money from savings, they’re not motivated to keep saving.  So, the clear path is to always be saving, and to keep having opportunities to spend that savings.

When teaching kids to save money, the first question seems to be: so what are good savings goals?  Really, the answer is whatever drives your kids to save!  It could be video games, or electronics, or summer camp, or a bike.  Kids should be encouraged to have goals, and then given the opportunity to save toward them.  This will motivate them to stick to their savings plan.  Just let them choose a goal, and help them to save toward it.

Aiming Higher: Set Larger Goals

Just as it’s important to always be saving, it’s also important to always have larger and larger savings goals.  Your end goal should be to create a young adult who can save for a few years to buy a car, or a few more years to buy a house.  Ideally, you’ll teach your kids that they can buy what they need in life through savings, NOT through borrowing.  Setting larger and larger savings goals is the only way to accomplish this.

The Final Secret: Long-Term Savings via the 401k Kid account

This is where it all comes together – in the second savings account.  This one is long-term savings, and we call it the 401k Kid account.  Here’s how it works –

  1. Your kid has a goal, and has saved toward the goal, and now has enough money to buy it.  Twice as much, in fact.  Imagine the goal is to save $100 for a new bike.  Junior has saved $200.
  2. In celebration of meeting the savings goal, take $100 out of savings, and go buy the bike
  3. Take out the other $100 and put it into the long-term savings account – the 401k Kid.
  4. If you have the ability, make a matching deposit – put an additional $100 into the 401k Kid account

We set up our kids long-term 401k Kid savings accounts when we realized that it’s hard to manage short-term savings (and spending) and long-term savings in the same savings account.  The kids all know what’s in their short-term savings accounts – but they don’t see their 401k Kid balance often.  (I could probably learn something from this.)

The end result is that kids learn how to save, they learn the benefits of savings, AND if you’re matching their 401k Kid contributions, they have in their long-term savings account every dollar they’ve ever saved.  When they leave home, they’ll have a large savings account built up, for college, or a house, or… whatever it is we adults save up our money for.

I’d be interested to hear – what are your kids saving up for?  How are they saving?  And what are the rules in your house for taking money out of savings?

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