Most of us are well aware of the importance of creating budgets and plans for our finances. Sometimes we forget that we also need to teach our children about planning and budgeting.
There are many ways to create a saving and spending plan for your child to help steer them toward a sound financial future. It can start with opening a bank account in your child's name.
- Opening a savings account in your child's name can help establish a lifelong habit.
- If you give your child an allowance, ask them to consider dedicating a percentage each week into their bank account.
- Some banks will allow you and your child to structure the savings account into two sections, one for long-term savings goals and one for spending goals.
- A savings account may be a better option for a child than a traditional checking account.
- Discuss with your children why it is essential to save toward their goals and encourage them to make a plan and stick to it.
Splitting the Pot
As soon as children start to receive money from an allowance and maybe from occasional gifts from relatives, it's time to sit down and show them how to make a saving and spending plan.
This used to be called "budgeting," but the word seems to have developed negative connotations. Regardless of the terminology, a plan is essential.
You have to give your child the power to decide how much to save and spend. By giving your child this power, you also confer the responsibility and excitement of making adult decisions.
You can make suggestions and prepare some example plans, but the final choice should be left to your child.
If the child's allowance varies in size, you should use percentages instead of set amounts (save 25% of the allowance versus $4). By giving your child a choice of how much to save, you can meet this exercise's goal, which is to teach your child to make saving a habit.
It would help if you did not interfere in how your child uses his or her spending money. To a child, a few dollars often seems like a fortune.
Don't interfere with your child's spending habits other than to point out that once the money's gone, it's gone for good and you won't provide a bailout.
It's a difficult lesson, but children will do better if they learn it early.
Explaining the Importance of Saving
Children are masters of interrogative sentences. Don't be surprised when your child asks you why anyone would save money.
The ideal reply has two parts. One, you have to save money for the future. Two, you save money so you can meet your spending goals.
When your child decides how much to save, you need to ask how much of that will be for the future and how much for goals.
Very young children should be encouraged to choose one spending goal rather than many. A piece of sports equipment, a toy, or any other realistic goal will suffice. They are able to see how regular savings slowly accumulate to make a purchase possible. This may even encourage your child to increase his or her saving rate.
As children grow, their goals will change from a toy to a car or a laptop. That's fine—as long as they agree to tap into the spending goal part of the savings account rather than emptying the long-term account.
The amount going to the future should remain constant. You can call it a house or college fund if you like, but nurturing the habit of saving is important.
Once the plan is complete, and you both agree on it, the next step is to go to the bank.
Ask your bank if they offer savings accounts specifically for children. These types of accounts may come with lower fees than traditional accounts.
Opening a Bank Account
Visit your bank in advance to find out what type of accounts are offered for children. You may be surprised by the incentives on juvenile accounts, which some banks view as a smart way to create the next generation of loyal customers.
After settling on a particular account, make an appointment to return with your child. Explain that a bank is a place where you keep your money until you need it. Your child should be old enough to have an understanding of interest—the money your bank pays you for letting it keep your money for a while. You can explain that the bank will use that money for investing purposes.
When you go together to the bank, let the bank associate sell your child on the account you have decided on. Your child will feel much more involved in the process. The account should be in your child's name, and the mail should be addressed to the child. Receiving bank statements like mom and dad is a source of excitement for most children.
Some banks will allow you and your child to structure the savings account. This means you can split the account into two separate accounts: one for the future and one for spending goals.
On the same day as you open the account, go shopping with your child and select a binder as a congratulatory present. You will use this to organize your child's bank statements. Starting with an organized record-keeping system will be valuable when your child gets older and has to grapple with taxes and accounting.
When the statements arrive, go through them together and explain the interest and any other numbers on them. You can even check the math together to practice doing sums. On the same day as you regularly pay out your child's allowance, go together to make a deposit at the bank. This will help to reinforce the habit of saving before spending.
It is also an excuse to spend time with your child. You can couple these trips with positive reinforcement, such as a walk in the park or a stop for ice cream.
How Do I Choose a Savings Account for My Child?
You don't have to go straight to the nearest branch of your own bank. In fact, shopping around for a child's account may help you identify a better bank or credit union for your own needs.
The criteria for a child's account are pretty much the same as for an adult's account. Look at the interest rates it pays on savings and check for fees and minimum balance requirements.
Access to a mobile banking app is a nice feature. Your child is growing up in a world in which mobile access is indispensable.
Should My Child Have an Online-Online Bank Account?
An online-only bank account is certainly an option. In comparing the features from a number of competitors, you may find the best deals from an online-only institution, or from a bank that has no branches near where you live.
It changes your game plan a little. Instead of a trip to the bank with your child, you can demonstrate how you're instantly transferring the weekly allowance from your own account to the child's account.
Is a Child's Savings Account Any Different from Any Other Savings Account?
Generally, a child's savings account must be co-owned by a parent or other adult relative. It should have a child-sized minimum balance, meaning a very low or zero balance requirement. Make sure it has no monthly maintenance fee or your child will learn a hard lesson indeed.
You may be offered a debit card with the account. It's up to you whether your child gets access to it.
The Bottom Line
Having a plan and tangible goals are as important to children as they are to adults. In helping your children chart out their saving and spending plans, you may find ways to improve or clarify your own. Or, possibly, to start one. "Do as I say and not as I do" doesn't work for long.
For both parent and child, a straightforward savings plan can remove many of the fears that keep people from investing later in life—particularly the misconception that it is too complicated.