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Reader-Submitted Question of the Day - Day 4
By JLP | May 2, 2008
Today’s question of the day is a really good one:
JLP,
I’m in the process of teaching my 11-year old daughter about money and the importance of saving for the future - regardless of her goals (i.e. college, a home, a new car, etc.). My personal efforts are equal to saving approximately 25% of my income, but for a child without living expenses I feel the percentage should be higher. I want to avoid forcing her to save in fear that she will, as many pre-teenagers do, rebel and not want to save at all. So…
What percentage of her money should she be allowed to spend on frivolous items and how should I go about explaining the importance of saving?
Thanks, Beth
That’s a tough one. Kids (and many adults) have a hard time seeing past their noses and therefore do not understand the concept of saving for the future. My boys at ages 11 & 12 are just now starting to understand the importance of saving money.
One thing you can try it to let your daughter pick out a toy or something that she wants that requires her to save money to buy. Cut out a picture of the item and help her figure out a savings plan to meet that goal. You could even match her savings as a way to encourage her to save. There is nothing that will make a kid feel better than the realization of a goal. I remember when my boys bought a Playstation 2 several years ago. They were so proud of that purchase.
Another thing you could do is to show your daughter your savings account for something that you and your husband is saving up for and explain to her why you are putting money back for that particular goal.
Take the time to explain to her the different ways to buy things (cash vs. credit card). Explain to her how buying something with a credit card is really using someone else’s money and that it has to be paid back with interest and that interest is money that could be spent saving up for something else.
One last thing you could do is show your daughter what small purchases can add up to. I know my boys went through a stage where they had to buy something every time we went out. It drove me nuts but I reluctantly kept my mouth shut and let them spend their money as they saw fit. Eventually they figured out that if they bought a pack of gum or something small, it would take longer for them to reach their goal of buying a video game or some other larger purchase.
As far as the percentage that should go to savings goes, I don’t see a problem with you requiring your daughter to save 50% of her allowance. But, I do think that if you require to her to save that much that the other 50% is up to her to decide how to spend (as long as she’s not buying something really stupid). Kids do need to learn that there are consequences for their actions and if we as parents don’t allow them to feel the hurt, they won’t learn.
Finally, your daughter should be thankful that she has a mom who cares for her as much as you do. My guess is that eventually she will.
Now it’s time for AFM readers to weigh in with their thoughts. What advice do you have for Beth?
Topics: Kids and Money, Question of the Day |
May 2nd, 2008 at 12:55 pm
I agree that matching savings/investments can be a great way to get kids excited about saving.
Kids generally have too little money to notice and appreciate the wonders of compound interest, but you could acheive that by offering her 25% on her savings monthly (or some other high rate). Each month let her know how much you’re adding to her bank account or piggy bank, explaining that banks pay you for saving (technically lending) in the same way. This way she learns about interest rates and is also motivated to save.
And when she chooses to blow her birthday money rather than save it, make a note in your calendar to come back 3-6 months later and tell her how much she would have now if she’d saved it. Ask her if she’s glad she bought that long-forgotten toy or if whe wishes she had some of that money back.
She’ll learn over time. The most important thing you can do is to talk about money matters and get her familiar with concepts such as saving, spending, budgeting, and borrowing. It’s amazing how many people get all the way to college (or beyond) without such concpets even crossing their minds.
May 2nd, 2008 at 4:29 pm
My parents started teaching me at an early age. Some summers my brother and I would have garage sales to raise money for school clothes.
May 2nd, 2008 at 5:05 pm
Andrew Tobias in his book the Only Investment Guide You’ll Ever Need has an interesting a funny story about teaching kids the value of compound interest. You need to read about this from him cause I don’t have the details exact, but….
He tells each of his kids (2 boys) that he will give each of them a dime a day for a month and compound the interest at 10% daily. Basically the first day they get 10 cents, the second days 11 cents (10 cents plus the 10% interest on the saved dime from yesterday), etc. However he throws in a catch. The day they start he holds up a bag of M&Ms and says that which ever one wants it can have it and doesn’t have to share, but his interest will not start compounding for 1 week of this 30 day trial.
Well of course both kids want the M&Ms cause like you said they can’t see past their nose. Somehow he decides which one to give it to. So they start the month long compounding w/o one of the kids getting the benifit of compounded interest on his “banked” dimes for a week. At the end of the month the kids who didn’t get the M&Ms earned a lot more money than the one who went for instant gratification (M&Ms). Its a great lesson on the power of compounding interest and delayed gratification.
Anyway read the book or get it from your library - its a good read, in addition to having the funny story on teaching your kids about compound interest.
May 4th, 2008 at 1:31 pm
I agree with the above comments. It would be really cool if you can get her to realize the power of compound interest.
May 5th, 2008 at 8:54 am
In our house, we do a 10/20/70 split…
10 percent giving
20 percent saving
70 percent spending
But, we offer bonuses when the kids choose to save.. like paying half for a nintendo if they save have, etc…
Great post, btw..
May 7th, 2008 at 7:45 am
One of the best foundations for appreciating savings is to make sure your kids appreciate the value of money. My parents were always keen to tie any money they gave me to good grades or helping around the house.
It can be very easy for money to become ‘just stuff that Dad gets out of the ATM’ which I think leads to kids spending it more on frivolous items, since it doesn’t feel finite.
May 11th, 2008 at 11:34 pm
I can’t speak on the basis of success, my kids are still too young to know how well the lesson(s) worked. That said, I’m sold on the advice to pay “kid interest” (5%/month), do NOT exercise control over save, spend, give (beyond enforcing house rules), and cross your fingers. See “The First National Bank of Dad: The Best Way to Teach Kids About Money” by David Owen for my source.