It’s almost never too early to start teaching your kids about money and the importance of savings. Helping your kids understand a few money basics early on will empower them to be more thoughtful savers and spenders, and ultimately prepare them for a successful financial future.
According to T. Rowe Price Group, kids’ money habits are formed before they reach high school. Children look to their parents as their primary example of what money management looks like. By demonstrating financial responsibility and helping your kids understand money-related decisions, you’re helping them develop a strong foundation that will give them confidence in their own financial decisions down the road.
Depending on your child’s age, here are five different money-related conversations to have in order to help them learn about making positive financial decisions.
1. Open a savings account in their name
One of the best ways to introduce the concept of savings to your child is by opening a savings account in their name. Seeing an account in their name can increase their sense of ownership in the savings process and help them understand what it means to have an account at the bank.
The Consumer Financial Protection Bureau recommends that you should open an account for your child when they have more money in their piggy bank than you’d like them to have easy access to. But even if they only have a small amount, it can be fun and educational to open a savings account and learn the benefits of letting that small account grow by saving more.
Rather than opening a standard savings account, it’s best to open a savings account that’s intended exclusively for kids, such as First State Community Bank’s Junior Savers Club. These accounts generally offer competitive interest rates and don’t require kids to maintain specific minimum daily balances.
By enabling and encouraging your kids to manage their savings from an early age, you’re helping them build their confidence, sense of ownership, and financial decision-making skills.
2. Introduce the principles of budgeting
Another great way to start teaching your kids about money is by helping them learn about budgeting.
For example, when it comes time for back-to-school shopping, you may want to consider giving your kids something like a $50 budget to buy the supplies they need for class. That way, they can figure out how many pens, pads, binders, and other supplies they can purchase within that budget.
3. Talk to them about financial planning
To help your kids become great savers and develop shrewd financial skills, introduce them to the basics of financial planning when they reach an appropriate age.
Long-term financial planning can help kids afford big-ticket items in the future. For a middle schooler, that might mean saving up enough money to buy a new gaming system or tickets to their favorite band’s concert. For a high schooler, it might mean putting enough money away to buy their first car.
The earlier your kids learn about financial planning, the better positioned they’ll be to afford things they want to buy in the future.
4. Teach them about compound interest
Your kids will be happy to learn that, when they store their money in a savings account, it grows over time thanks to compound interest. This knowledge could encourage them to get in the habit of saving so that they can earn more interest income each year.
When teaching your kids about compound interest, use a hypothetical example to illustrate how it works. For example, let’s say that, at the beginning of the school year, a sixth-grader puts $500 into a savings account that pays 2 percent interest annually. By the time that student starts seventh grade, their $500 will be $510, assuming they didn’t make any other deposits or withdrawals over the course of the year. By the time they start their senior year in high school, the initial $500 will have grown to $563.08.
Convey the fact that more interest is earned as more deposits are made and a savings account balance continues to increase. All of a sudden, affording that gaming system or first car is that much easier.
5. Play finance-related games
Games make everything more fun, including learning about money and savings! Playing money-related board games (such as Monopoly!) can introduce concepts including earning, saving, and buying in a fun and low-pressure environment.
To help kids learn about money and savings, we created a free app called Junior Savers that introduces money basics through fun, age-appropriate games.
Remember that your kids are looking to you as role models for money management, so you’re in the best position to help them understand the fundamentals of money and savings. Helping your kids understand money from an early age will give them the knowledge they need to make wise financial decisions and establish positive money habits that will have lifelong benefits.
Have questions about talking to your kids about money and savings? We’re here to help! Get in touch here.