Teaching children to save money

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, The Money Tree Myth, (out of publication) 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.