Saving money is an unnatural act for most kids. How should you encourage them to develop good financial hygiene? Your kids may not appreciate your guidance now, but years later they may look back fondly on your wise counsel. We can only hope.
Mark Twain said it best:
When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much he had learned in seven years.
I have some suggestions on how to develop good financial habits in kids of various ages.
1. Open a bank account. We all need to understand about losing our debit card, incurring fees, safeguarding passwords, using peer-to-peer payment systems, and overdrafting our balance. The easiest way is to have a bank account and experience these things. These lessons are best learned when the stakes are small.
2. Offer a better deal with the “parent bank.” When your kids have some money (e.g., birthday gifts, babysitting jobs), encourage them to save it with you, rather than spend it. Incentivize them by offering a high interest rate.
How high? Simply put, whatever it takes for them to accept the offer. Start with 1% per month and go higher if necessary. You want them to internalize that this is better and more important than spending the money now.
And, just like a regular bank, always give them the option to withdraw the money from the parent bank and spend it as they choose. If they do, they’ll hopefully regret the foregone savings and interest. Track this on a shared spreadsheet where they can see their balance and the accrued interest and maybe they’ll even learn about compound interest.
3. Open a Roth IRA when they have earned income. For teenagers who have reportable income, there is no better way to save than a Roth IRA as that money will grow tax-exempt forever. And, they won’t see it in their checking account waiting to be spent. How do you encourage them to put this money away? Incentivize them by offering a match (just as some employers do with 401Ks).
How big of a match? My same glib answer as above: whatever it takes to close the deal. For example, one of my daughters quickly valued the incentive but the other had no interest in a Roth IRA, with or without a match. This is what makes parenting fun.
Note that you can withdraw contributions from a Roth IRA at any time with no financial penalty. So, if your teenager plans to use this money for college, it is still a good deal to put it into a Roth IRA now.
And for you grandparents, I can think of no better gift than a contribution to your grandkids’ Roth IRA. They’ll still love you even though that may not have been exactly what they had in mind for their graduation or birthday present.
4. Talk to your kids about money. For many of us, money is a taboo topic, right beside sex, drugs, and death. Don’t make it so in your house. Have an occasional discussion about spending behaviors, how much things cost, making choices, paying for college, charity, expectations around an allowance, and all the money mistakes you’ve made.
Teach your children well and many years from now they may be grateful and realize how much you learned as they grew up.
Or, as Graham Nash sang:
So just look at them and sigh
And know they love you.
Questions about Roth IRAs for your kids? Please get in touch.
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