Teach your children good saving habits

Parents want the best for their children. They give them the best food, send them to the best schools, get them the best medical and dental care they can. But what else could you do to help your kids (or grandkids) the most? Put them on the path to financial independence and a comfortable retirement.

Einstein may or may not have called compound interest the “eighth wonder of the world,” but there’s no doubting its advantages. As soon as your kids start earning an income, whether from a summer or after-school job, a newspaper route, or a babysitting business, they can start saving and investing part of their earnings.

By investing early in life, kids not only put the magic of compound interest to work, they learn crucial habits of saving and deferred gratification that will serve them throughout their lives.

If a person saved $50 per month ($600 per year) for 10 years from age 16 to age 26, then stopped saving, at age 66 the person would have $132,825.84, assuming a 7% annual return. But if the person did the same thing but waited to age 26 to start saving, at age 66 they would have $67,521.92, slightly over half as much.

If your child got a job at age 16 and contributed the maximum $5,500 each year to a Roth IRA, and continued that throughout their working life, at age 66 they would have a tax-free $2,392,422.75 built up for retirement, again assuming a 7% annual return. (Also remember, though, assuming 3% inflation, that would be equivalent to about $800,000 in today’s dollars).

The problem is that many children and young adults prefer to spend their incomes instead of saving. Here are some suggestions for encouraging kids to save more:

  • Encourage children to save for a desired expensive purchase, such as a bike, iPod, or car. By saving up for purchases, children can learn to budget and save for the future.
  • Have your child run some compound interest numbers on moneychimp.com to illustrate the power of compounding and the importance of starting early. Also point them to inspiring examples of successful saving by other young people like Mr. Money Mustache.
  • If you have a business, encourage your children to pitch in. This can teach them the value of work and earnings. Sole proprietors do not have to pay payroll taxes for children under 18, and can deduct the child’s wages as a business expense.
  • Match your child’s savings dollar for dollar. If your child decides to save $500 for the year, match that amount for a total savings of $1000.
  • Give them money instead of other gifts at special occasions like birthdays and graduations, and Encourage other relatives and friends to do the same. Suggest that children save all of some of the monetary gifts.

By teaching your kids or grandkids good money habits early, you will give them a valuable gift that will last a lifetime.

Keep in mind, however, that you should only do what is financially feasible relative to your own savings goals. Financial advisors encourage you not to put your children’s future retirement ahead of your own.

For additional information

For more ideas for teaching children good savings and budgeting habits, see these articles:

Tips for Helping Kids and Teens Save Money

The 5 Most Important Money Lessons To Teach Your Kids

11 Ways to Teach Kids How to Save Money