Most of us are well aware of the importance of creating budgets and plans for our personal finances. However, sometimes we forget that we also need to teach our children about planning and budgeting. This article will look at creating a saving and spending plan for your child to help steer them toward a sound financial future.
Splitting the Pot
As your child starts to receive money - for example, from an allowance - it is time to sit down and show them how to make a saving and spending plan. (For related reading, see Use Allowances To Create Financially Sound Kids.)
This used to be called "budgeting", but the word has gained too many negative connotations. Regardless of the terminology, this plan is essential. You have to give your child the power to decide how much to save and how much to spend. By giving your child this power, you will also confer the responsibility and excitement that comes with making adult decisions. You can make suggestions and prepare some example plans, but the final choice should be left to your child. (To learn more, read The Beauty Of Budgeting.)
If the allowance payment will vary, you should use percentages instead of set amounts (save 25% of the allowance versus save $4). By giving your child a choice of how much to save, you bypass the question of whether or not to save. This is, after all, a saving and spending plan, rather than the other way around. The goal of this exercise is to teach your child to make saving a habit. (For more about establishing good saving habits, see Savings Plans For Minors and The Generation Gap.)
You should 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 it's gone it's gone - you won't provide more money if your child spends his or her own too quickly. It's a difficult lesson, but children will do better if they learn it early. (To read more, see Teaching Your Child To Be Financially Savvy.)
Explaining the Importance of Saving
Children are masters of interrogative sentences; don't be surprised when your child asks you why he should 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 will then have to ask them how much of that will be for the future and how much for goals.
If you child is very young, you should encourage him or her to choose one spending goal rather than many. A piece of sports equipment, a toy or some relatively inexpensive item will suffice. Your child will be able to see how X% of his or her money will go into savings and X% of that will slowly accumulate to buy a chosen item in the near future. This may encourage your child to increase his or her saving rate.
As your child ages, he or she may want to save for a number of different spending goals - a car, a computer, a stereo. That's fine - as long it all comes from the spending goal fraction of the savings account. The amount going to the future should remain constant. You can call it his house or college fund if you like, but nurturing habitual saving in your child is more important than his or her monetary progress. Once the plan is complete, and you both agree on it, the next step is to go to the bank.
Opening a Bank Account
You should visit your bank in advance to check what type of accounts are offered for children. You may be surprised by the incentives on juvenile accounts, which banks view as PR expenditures aimed at creating the next generation of loyal customers.
After settling on a particular account, set up an appointment to attend with your child. Explain that a bank is a place you put 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 holding on to your money - and you should explain that banks use that money for investing.
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 all the mail should be addressed to your 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, a congratulatory present. You will use this to organize your child's bank statements. Starting out with an organized record-keeping system will be valuable when your child gets older and has to grapple with taxes and accounting. (For related reading, see Get Organized With An Investment Analysis Form.)
When the statements arrive, go through them together and explain the interest and any other numbers that may appear upon it. 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 the 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 some positive reinforcement, such as a walk in the park or stopping for ice cream. Saving should feel good!
Having a plan and tangible goals is as important to adults as it is to children. In helping your children chart out their saving and spending plans, you may find ways to improve or clarify your own (or start one - "do as I say and not as I do," doesn't work for long). Additionally, being well organized, especially in respect to financial information, will remove many of the fears that keep people from investing later in life - particularly the misconception that it is too complicated.
For further reading, see Teach Your Child About Investing.