Do you remember when you were young and you got a birthday card with $10 in it? I certainly do! The first thing I wanted to do was find a shop and spend that crisp fresh note. Save it? Not a chance!
As a child, you're at the perfect age to learn how to save money and why it's important. Adopting this habit at a young age will set a child up for financial success later in life. To get the best engagement, I'd recommend starting at an age no earlier than 7, but this could vary depending on how advanced your child is. It's something you'll have to gauge as a parent.
It can be quite a hard concept to convince your children that saving is a great idea and should be done, right? Yes, it can be tricky, but there are a few techniques to experiment with to see which one works best in a given situation. Here we'll discuss two techniques and how to apply them. They both involve you adding some of your own money to the pot, however I will discuss a way to teach the saving concept without using money at the end of the article.
It doesn't really matter how your child comes into money, but let's use a practical example so it's a bit more relatable. We'll apply the different techniques to this example too.
SCENARIO: Your child completes chores and earns pocket money for doing so. The amount they receive is $10 per week.
TECHNIQUE 1 - Match the amount they have if the money isn't spent for a determined amount of time
This is pretty simple. You say to your child that if they don't spend their $10 for X amount of time (time span will vary depending on the age of the child) that you will match their $10 with $10 of your own, leaving the child with $20 total.
Gauge what you think would be an appropriate amount of time for your child to wait. It could be a week or it could be a few months. The dollar amount might also influence the time span you wish to wait.
TECHNIQUE 2 - Apply compound interest to the money that they don't spend
This is a great teaching moment for the power of compound interest. To make it interesting though, you'll want to up the ante on the compounding amount to at least 10%, and probably compound it monthly to really show the impact. Essentially you'll be acting like a super bank.
This technique can be a bit tricky and will require a bit of math by the parent. Eeek! Math, I know! But learning how the compounding effect works at a young age is a massive win. You might need a spreadsheet to do it, or a whiteboard/pen and paper with a calculator. Check out the image below for how it can look in a spreadsheet.
That's great, we know what it can look like, but how do you build your own? Here's how to do it:
Create a table with 7 columns like I did in the example above
Write the date and dollar amount every time your child gets some money (or takes money out)
Also write the number of days it has been since the last bit of money was contributed
Calculate the interest % earned from having that money (interest rate / 365 x # of days held)
Add the previous line cumulative total, the new contribution, and interest earned to get the new cumulative total
Add in commentary for why money was added or taken out
Display in a place your child can see it change
See the snapshot below for HOW TO within the spreadsheet. Hopefully it makes is a bit clearer to understand.
I realize this method is a whole lot more complicated than the first technique, but it's a wonderful way to teach the power of compound interest in real life. If you're interested in the template, you can find it on our website by clicking HERE. It's in our "Resources" section under "Tools".
Let me know if you find it useful or if you have any feedback on the tool itself. Original inspiration came from Mr. Money Mustache's savings spreadsheet he created for his kids (article link here).
Teaching the saving concept without using money
Now if you want to teach your kids the power of saving and compound growth but don't want to use actual money, I've got you covered. All you'll need is a large jar and a big bag of candy. Skittles will work well as they're small and relatively inexpensive.
The process is simple. Add 1 skittle on week one and keep doubling the amount of skittles added every week. So week 1 you'll add 1 skittle, week 2 you'll add 2, week 3 you'll add 4, and so on. It gets pretty ridiculous after week 8 or 9, but it shows the exponential growth effect of time. Get your kids to add the candy so they can see how much they have to add each week.
SUMMARY
The perfect time to teach kids about the power of savings and compound growth is when they will absorb the information. There's no "right" age as each child is different. Gauge your child's interest and approach the topic when you feel they are ready.
In my opinion, the jar & candy method can be used at a younger age than the other 2 techniques we've covered, simply because it doesn't involve real money and it focuses solely on compound growth.
Give these techniques a go and let us know which ones work for you and why. We're always keen to hear from our readers!
Blake - FIRE with a family