Strategies for Teaching Kids about Money and Savings

One of the most important financial concepts is that of saving. Whether it is saving up for something short-term (like a family vacation), a medium-term goal (like a down payment on a home) or something long-term (like retirement), effective saving strategies are important. Knowing how to save prepares you for the future, teaches discipline and keeps you from the servitude of debt. Teaching kids about money and savings is a very important part of their life-skills education. When it comes to finances, showing your children how to save — and encouraging the practice — is one of the best things you can do for them. It will help your child start down the lifelong path of financial independence. Here are some strategies you can use to teach your kids to save money.

Saving strategies, ages 3-7

Young children are visual. They need to see concepts in order to begin to understand them. Even at age 3 (or even younger), children can start understanding the concept of money. Giving children an allowance or letting them earn money for chores around the house can teach them to allocate their money. Use different jars or envelopes for different money uses. I keep things simple for my son: We have a jar for church donations, one for long-term saving (which he empties and takes to the bank), and one for spending. This is a very visual way to show my son that it is important to immediately set aside money for purposes other than consumer spending.

To help your young child more fully grasp the concept of saving, have him or her think of a toy, book, game or movie they want. Have them draw it, or cut out a picture of it. Then talk about how much time it will take to save up. My 6-year-old understands weeks on the calendar, so we figure out how many weeks of allowance (less donations and long-term savings) it will take for him to reach his goal. To him, it’s exciting to cross off each week, and he feels a sense of accomplishment when he can pay for his toy himself.

Friends of mine do something similar with their 3-year-old twins. The put a picture of the goal on a piece of posterboard and make spaces for quarters. (For these young kids, my friends only have them save up for a portion of the cost.) When they receive their allowances, after setting some aside for other purposes, the tape a quarter in place. Once all the spaces are filled up, they can have the toy. They enjoy seeing the board fill with quarters, and then being rewarded at the end.

While these feelings may not last much beyond the age of 7 or 8, such visuals give young children an idea of concept of saving, and they learn to feel good about working toward a money goal and then achieving it. And my son treats the toys he has bought himself with much more care than he treats his other toys.

Saving strategies, ages 7-12

If you already have a foundation for saving, set from a young age, it will be easier to carry that on as your child gets older. At this age, children begin to understand more abstract concepts. Teach them that saving should be a percentage of their income, and that it should be paid for ahead of other expenses. As you increase their allowance or chore payments, explain that they also have to increase their savings. Talk to them about what they would like to do later (in life, in the summer, whenever), and work out a strategy with them to help them pay for it. This gives your children an idea the saving up requires planning. If you’re feeling really ambitious, institute a “savings match” program, wherein you will match the amount your child puts into long-term savings (sort of like a 401k plan).

You can also begin talking about savings as a way to get through difficult times. If you are going through a tough time, let your kids know that your emergency fund is what’s helping you pay the bills. If you see a natural disaster on television, talk about the kinds of things a savings account could help with if such a thing happened to your family. Getting your child involved in money discussions and showing him or her how important savings are is vital to teaching this concept.

Savings strategies, teenagers

Teenagers are able to understand such concepts as interest paid and yields earned. Help your teenager open an online savings account or set up a CD ladder. It is vital that teenagers have a checking account and a savings account of some kind. If you already have your teenager primed for understanding savings through groundwork laid earlier, this is easier. Enforce the principles that you have been teaching all along. Bank accounts with minors should be joint accounts. Go over the statements monthly with your teen and discuss money strategies.

The teen years is a good time to introduce investing concepts. Encourage your teenager to open an IRA if he or she has a job. There are investment-style games online that can get your teenager interested in learning about investing. Talk about return and long-term planning. Encourage your teenager to think about products that they use, or companies they are interested in. Either invest in those companies, or invest in an index (my recommendation) that tracks them or similar companies.

If your child wants a loan, or an advance on his or her allowance, charge interest. Make a contract of terms on the computer, and show your child how much he or she will have to pay back, depending on the interest rate and the length of the loan. I know parents who charge between 10% and 15% interest, just to make sure their kids get this idea: It’s better to plan ahead with high yield savings than it is to have to take out a loan.

What are some of the strategies you use to teach your children to save money?