Most of us are well aware of the importance of creating budgets and plans for our finances. However, 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 for your kid.

Key Takeaways

  • Opening up a savings account in your child's name may inspire them to save money as an adult.
  • If you give your child an allowance, ask them to dedicate a specific percentage or amount 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 children's savings account may be a better option than opening a traditional checking account.
  • Discuss with your children why it is essential to save and encourage them to save and spend plan with you.

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. 

This used to be called "budgeting," but the word now has 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 spend. By providing your child this power, you will 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 allowance payment varies, 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. 

Spending Habits

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 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. 

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 your child is very young, you should encourage them 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 shortly. This may encourage your child to increase his or her saving rate.

As your child ages, they may want to save for several 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.

Ask your bank if they offer savings accounts specifically for children because these types of accounts may come with lower fees than a traditional account.

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, i.e., bank accounts for kids, which banks view as PR expenditures to create 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.

Get Organized

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 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 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 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 stopping for ice cream.

The Bottom Line

Having a plan and tangible goals are 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 concerning financial information, will remove many of the fears that keep people from investing later in life—particularly the misconception that it is too complicated.