Teaching Children to Save
Posted by Gail | Filed under Kids & Money
Saving comes naturally to some people. Not so much for others. And so it is with children. If you want your children to be savers, you need to help them establish the habit – the routine – of saving so that it becomes second nature to them.
When my daughter, Alexandra, was about nine, we were driving along when the radio contest winner was announced for the day. Alexandra and I started chatting about what we’d do if we found ourselves with an extra $1,000. Her first act: to put $100 into her savings container. She was nine years old and had the concept of savings down cold. That’s because she had been putting away 10% of her allowance for over three years. Saving came naturally to her because it was a well-established habit.
Read some of the research that tries to define why some people deal well with money and others don’t and you’ll see a pattern. The people who seem to have money in perspective and manage it well are those who as children had some money to work with. They also had parents who acted as their guides, setting expectations for how they would use their money. Not controlling them. Not whipping the money away at any small indiscretion. But setting parameters and taking natural opportunities to teach their children the lessons they would need to cope as adults.
If you want your children to be savers, you need to give them an allowance from which they can save. You need to set the expectation that they will save: the first thing that happens when they get their allowance is that 10% goes into their piggy bank. And you need to talk about savings in the context of how and why you do it, and what you’re trying to achieve.
One way to clearly differentiate between the different purposes for money is to set up money holders for each purpose. This is where the idea for the Magic Jars on Til Debt Do Us Part came from. In my book, Money-Smart Kids I recommended that parents use four containers, clearly labeled: Savings, Sharing, Mad Money, and Planned Spending.
Make sure you don’t confuse the idea of saving – for the long term – with planned spending, which is when you set aside some money each week or month to make a pre-determined purchase. Grown-ups confuse this all the time. They say they’re “saving” for a vacation when, in fact, they’re accumulating money they’re planning to spend: planned spending. Ditto the money piling up for car repairs, home insurance, and to buy a new boat. Savings are what you set aside for the very long term so you have some money when you’re no longer able to earn money, and it is savings that eventually lead to financial independence.
February 25, 2013 at 8:48 am
I am trying to set up a similar system for my son. I’m just not sure what kids are “saving” for when they are, say, 12 years old. Is he saving up for post-secondary? or retirement? or can it be for an upcoming big trip? Or maybe the big trip and post-secondary would be planned spending, I’m not sure. I’m also curious what percentages other people assign to the different areas.
February 25, 2013 at 10:02 am
I set up an allowance and jars for my children about three years ago. I use five jars: saving, spending, funny money, giving, and vacation (and the boys added scuba diving).
I wanted my boys to understand that vacations are not free. I give the kids $5.00/week for allowance, and 10% of which goes in savings. I top it up to $10.00/week, and have them put $5.00 in their vacation jar. They then have a certain amout to put in the other jars. If they wanted to save for scuba diving lessons, they worked for extra cash and saved birthday money. They are then responsible to pay for a plane ticket, hotel room, or car rental. I intentionally calculated it so that they will be successful and have enough money to join us. It also helps me to save, and makes them aware of how much those luxeries cost. They are only 8 and 10, and can tell you the cost of a hotel room in Sydney, Australia, a car rental in Grand Cayman, and a flight to the Turks & Caicos.
I was never a believer in allowance, but these lessons are so valuable. Not only is it teaching them the value of working and saving money, but it’s teaching them at at very young age that they need to do well in school and get a good job to be able to afford the things that they enjoy.
February 25, 2013 at 10:06 am
I can speak of this first-handed as once being a child with parents who were never good with money and now being an adult. I did struggle until my late-20s having consumer credit card debt and never saving. I did start a little late, but now in my late 30s, I can say I have no consumer debt and have some decent savings.
I look back now and realize how bad my parents are with their money. You don’t see this when you are growing up as you think it’s “normal”. Luckily, I did gain perspective, but it was definitely a longer process than had to be if I had good examples growing up.
I try and help them now with their money management, but you can only lead a horse to water, can’t force it to drink!
February 25, 2013 at 10:13 am
I think you’re right Michelle, the kids should know what they’re saving for, even if that means explaining what a retirement is.
February 25, 2013 at 10:41 am
A big mile stone in our lives as kids was when we got to take our savings down to our bank and buy our first mutual fund. I think we needed $25 to start off and we felt sooo grown up walking into the bank with that money!
February 25, 2013 at 10:44 am
@Michelle — when my siblings and I were that age, we were saving for post-secondary education. It was always understood that a certain percent of our income (starting with babysitting and a paper route through to part time job in high school) was earmarked for post-secondary. As we earned more, we put a higher percentage of our earnings into education savings. (Graduating with little or no debt was our financial priority rather than saving for retirement.)
I guess by Gail’s definition that’s “planned spending” but it still taught us to set aside money for a long-term goal. We were also encouraged to set aside money for short-term goals as well, and I can’t remember a time when I didn’t have a bank account and could watch a bank balance grow. We also had some “pocket money” to spend and often make mistakes with. (Ah, those “teachable moments”!)
I’m incredibly grateful I had parents who were smart about money.
February 25, 2013 at 11:09 am
My two girls, 8 and 11, get $1 per year of age per week ($8 and $11 per week each). We have three “main” jars – 10% long term savings – for them, this is their post secondary/retirement money; 5% charity money – money they use for fundraising at school, Terry Fox, etc.; and the rest into the spending jar. However, this spending jar is then broken down further if there is something specific the girls are saving for. For instance, my oldest is saving for a kitten – so she has researched how much it will cost to buy one (from humane society), but she is also saving for the first vet bills as well. My youngest is saving for an iPod touch. They are both putting their full “spend” money away for these “big ticket” items. Sometimes, they spend their money fully. But…it’s amazing to see how that changes when they realize that the money they spend is gone on frivolous things – and they start seeing the value of saving for what they really want, not just dollar store items. I don’t tell them how to spend/save this money – it’s up to them. I give them tips on what they might want to do with it, but it is their money. It is tough to see them spend it on “junk”, but it is paying off on teaching them how to save for things they truly want to have.
February 25, 2013 at 11:32 am
My son is four months old and my husband and I have opened up an RESP for him. If we will have enough money saved for post-secondary for him through this alone, what should we tell him to save for? I believe in savings, but he won’t actually need it for school… any suggestions?
Also, does it strike the younger sibling as unfair if they receive less money than their older siblings? I have read about Gail’s suggestion to give the age/dollar amount weekly, but wouldn’t you feel left out if you weren’t the oldest? Seems arbitrary no?
February 25, 2013 at 12:14 pm
@ lindsaymarie – to quote my mother, “life isn’t fair.” And if you make it balanced, it will be unfair because what an older child might want to spend on or save up for (like clothing) might be very different from what a younger child wants, just my two cents.
As for the resp, even if you give the max of $2500 a year it’s unlikely it will be enough to fully cover your child’s education. Personally, I like the idea of my son paying at least 30% of his expenses – I want his skin in the game. It’s very easy to play fast and loose with other people’s money, not so hard if you’ve worked at mcdonalds last summer to pay for it. I figure whatever is leftover we’ll use to pay off his student debt when he graduates, if he has any.
It’s like a conversation I had with my boss who said that he’d pay the first two years of his daughter’s university, and she had to pay the last two. I said he should reverse that order. Everyone pays the same amount, but it puts the onus on finishing on the child.
February 25, 2013 at 1:16 pm
My children, who are currently 20 and 23, started getting an allowance when they were 2 and 5 years old. Gail’s advice works!! They are both young adults who have an excellent understanding of their finances and are able to manage their money effectively.
They both used their savings as long term planned spending and understood they were accumulating the money for post-secondary education or to purchase a car when they were old enough to drive.
As the children grew older, we gradually gave them more money than their allowances. We saw they were making (mostly!) responsible choices with their allowances so we started to give them money we would have spent on their behalf. We started with the money earmarked for hot lunch day at school and fieldtrips. Then they received the cash we would have spent on school supplies and haircuts. We watched their behavior and, as they made good choices, we rewarded them with more responsibility and more money.
By the time the kids graduated from high school they were paying for everything on their own behalf including clothes, vehicle insurance, cell phone bills, registration and application fees for post secondary education, extra-curricular activities.
Our goal as parents was to send them out into the world with the skills needed to become fully functioning adults. We felt that money skills were an important part of that picture. If we gave them money and responsibility for making choices with that money then they were able to gain the money skills needed as adults.
Our youngest attended university for one year to gain a certificate as a dental assistant. She graduated with no debt, currently has an RRSP and a TFSA and is saving a down payment for a condo.
Our oldest is still attending university and has some student debt but has a specific plan to pay off that debt when graduated.
Take Gail’s advice and give your children money to learn those badly needed skills with. Her advice works!!!!
February 25, 2013 at 1:33 pm
Yes, teachable moments! when I was a young teen (still at the babysitting stage) my dad took me to the bank and I took out a $100 loan. I had to work all summer to pay it back. Not quite what Gail advocates re teaching children to manage money by giving them money but I did learn that loans (now credit cards etc etc) have to be paid back with interest..and a lot of hard work (babysitting 3 kids under 5 and helping with the housework!) and bless that bank manager for going along with the lesson. I guess my dad cosigned but I knewt it was my loan and my responsibility.
February 25, 2013 at 1:42 pm
My kids ask me, “What am I saving for?”. Your future, I reply. The 10% they put aside as savings is really an investment fund – they won’t spend the principal. Ever.
At first, it goes in the bank to earn interest – and they learn what banks do with their money when they deposit it. When they accumulate enough, we explore the world of GICs and stocks and bonds, teaching them about the different aspects of finance and the concept of risk.
Saving for an education, a car, or a home is planned spending and should be separate from the 10%.
The point is that the 10% is not planned spending at all. It is put aside in order to generate income in the form of interest, dividends, and (if they are fortunate) capital gains. It is the money that makes them money, and they should contribute to that fund for the rest of their lives. I hope that the habit of putting aside 10% throughout their lives provides them with a nice source of income to supplement their earning years and their retirement.
February 25, 2013 at 2:16 pm
I don;t have kids yet, but I am already planning to set these practices into place if they come along. I was not taught any money management as a kid – and even worse, I had money to burn! My parents had their own business that I started working at quite young and always had some money (or what seemed like a lot at the time – $20 when you are 11 is a lot of $!!) but was never given any guidelines on what to do with it. Added to that is the fact that parents were lucky enough to be successful and gave us the model that you can buy whatever you want, whenever you want – and that shopping is a hobby :S. I took these lessons into adulthood, so even when I was making a good living living at home I burned through all my money before the next paycheque and when I “suddenly” was forced to move out on my own, it was a shock. I went into debt so fast! Took me a few years, but I managed to get myself together and now that I am married, I am teaching my husband all these things!
February 25, 2013 at 2:21 pm
@lindsaymarie–our kids are two years apart. They don’t balk at the difference. i think it depends on how you present it, so we made sure that it was fair (based on age). We also reminded the younger one that when he’s 8, he will get $8 as well. We’ve taught them for a long time that Fair is not always Even.
February 25, 2013 at 3:14 pm
Both my daughters(17+18) have had part time jobs for 2 years and each get $100 a month for clothing/transit allowance .By their own choice, they haven’t touched the money they earned from their jobs (working in a bakery) and have chosen to “live” off, their allowance,babysitting money, driveway shoveling money, sell stuff on Kijiji money (basically any Cash they get). Between them they have over $10k saved.
I never knew if what I had taught them (and you too Gail from TDDP +Princess) about being responsible for their own money was a lesson well learned, or a “my horrible mom” story, til this past weekend. My 18 year old was shocked that her friends (most of who have part time jobs) never get to touch their own money but instead were just given money when they asked for it. When one of her friends said “ I’m not sure if I should buy this, I think I might be spending more than I have in my bank account” she was horrified that her friend didn’t even know how much money she had left, or rather , how much she had spent. She told me that she was glad that I made her and her sister pay for their own clothing, entertainment, gifts etc . because she felt they would be able to survive in the “real world”.
It’s like when parents do their kids projects for school. Good luck in the real world darling, I don’t think the boss will be impressed if you get your mom to do your job for you.
February 25, 2013 at 3:17 pm
@Linsdaymarie29
My girls both have RESP’s for their education, however I had told them both that they would have to save for their own education, because I wanted them to know that an education is a privilege not a right. Now that daughter #1 is in University, she knows that her education is paid for, but the extra stuff: school sweatshirts, extra activities, meals out etc are up to her to take care of. She also knows that her education fund will only go so far, so its up to her to make up the difference (savings, scholarships etc) if she wants to continue past the 3RD year.
February 25, 2013 at 4:18 pm
My parent’s never really outright taught us (4 kids) about money, but we all learned through osmosis. My parents did well, very well. They said (there was little pressure) to focus on school, rather than get part time jobs or anything. Something about not wanting us to succumb to the almighty dollar.
For kids and short term goals, I remember saving like crazy to buy our Playstation, then every game after that. Never saved for school, but my parents would give me the money to pay the tuition, so I had to do the paper work part, which opened my eyes, after which I helped out. I am for sure going to get my kids to do their own paper work.
February 25, 2013 at 6:33 pm
I learned about money by reading and observing others and conversations with my parents. Less by practise. Allowances were minimal and not tied to chores. I’m doing the same for my children. I’m teaching them about not wanting vs. keeping up with the trends. By not taking them shopping, I believe they are learning more. They do get allowances (their age in dollars/month) and one has a part time job, but they don’t spend money on junk, and they carefully think purchases through. They have less money to spend than their peers, but that’s life. They also have closet and floor space
February 25, 2013 at 10:02 pm
Who has the best saving account for kids? My daughter is outgrowing her piggy bank.
February 25, 2013 at 11:09 pm
@ib, I found that ING direct has the best account for children at 2% interest. And right now if you open an account with a minimum balance of $100 they will give you a $50 bonus.
And if you use my orange key, 17035926S1, you will be supporting a single parent’s son’s future.
February 26, 2013 at 12:29 am
As much as I love internet banking, I would like to take my daughter to a brick and mortar bank for now. I need her to physically give the momey to someone and see the whole process.
Any ideas?
Thanks Robyn.
February 26, 2013 at 12:50 am
I am so fortunate that my parents taught their children well. Her father and I taught our daughter as best we could and, including the “learning lessons”, she has a very good sense of money, debt, credit, student loans, etc. We were very fortunate in that she won enough scholarship money to go through university on someone else’s dime. Her PhD studies took some loans though, yet she put a lot of thought into paying those back and has done admirably well to stay ahead of her payment schedule.
What she doesn’t know is, all the money her dad and I put away for her studies went to the purchase of a house which will be in her name when she turns 35. (unimaginable, but in a matter of 2 short years!). While giving her a house may seem very princess-like, we feel she earned it through her dedication and willingness to find ways to put herself through university without asking us for a cent.
Whenever she got money, whether allowance, a gift, a job (starting working at the age of 15-her choice), she put a portion into her savings, a portion into fun money, a bit to charity, and some to her do-something-awesome fund. The “awesome fund” as it’s known, is going to be a huge vacation with her friends this summer. She’s been saving for years, so I know it’s going to take a very small portion of her fund. And, upon her return, she has an appointment with a Financial Counselor, so she can figure out where to best place those funds for future growth and retirement.
With her employer funding her retirement fund at 10% (a rarity these days), and her methodically researching where to invest her monies, I feel very proud that she’s money-smart. I know it wasn’t just her dad and I, nor her gramma and grandpa. She is 100% a Gail-believer, and has an entire library of your books Gail. She’s well ahead in this world because she’s read, and re-read your books, blogs, and materials. Thanks Gail, for being there for her, and for me. You are a God-sent-gift to both of us!
February 26, 2013 at 9:09 am
To add to my message above, we have had RESP’s for our girls (8 and 11) since they were babies (got their SIN numbers right away). Each month, when we get the Child Tax Benefit (used to be called Family Allowance), the money automatically goes into an account for the RESP. We don’t touch it. So easy to save money for the kids. The gov’t gives you the money – and you put it into an RESP – and then the gov’t gives you more money for it (RESP grant). It’s a no brainer!!
February 26, 2013 at 12:39 pm
I give my boys an allowance and it gets put into their bank account by me. They do have a debit card that they can use.
They have to pay for some of the things they want and need but not all. When they start “whining” that they need something new and I really don’t think they need it, I tell them they can pay for it with their money. Amazing how quickly they rethink it. This stops a lot of crying for stuff they really don’t need.
We also have the right to veto something they want to buy even if they have enough money. My youngest had enough money saved in his account at the age of 8 to buy an iPod. Knowing my son, I told him he had to wait. I let him buy it on his 10th birthday. He appreciated it more and I knew at that age he would take care of it.
My husband and I have made a lot of mistakes with money. I talk to my kids about that all the time. They will have RRSPs and TFSAs when they are old enough to have them.
February 26, 2013 at 10:39 pm
I’m using this pracitce to get my parents who are 60 and 65 to do budget and put more away, yup my parents.
My wife and I hve been on a budget for years
You Rock Gail.
Byran
March 6, 2013 at 2:49 pm
I’m looking for a Canadian financial literacy unit plan that I can use with my grade 7 students. Does anyone have any recommendations?