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How to Create a Child’s Savings Habit

Most of our habits, both good and bad we learn in childhood. By encouraging your child to save money early in life you are preparing them for a lifetime of financial responsibility and prosperity.

Einstein once referred to compound interest as one of the wonders of the world. A great example of the power of compound interest comes from the selling of Manhattan for a handful of beads:

In the early 1600s, the American Indians sold an island, now called Manhattan in New York, for various beads and trinkets worth about $16. Since Manhattan real estate is now some of the most expensive in the world, it would seem at first glance that the American Indians made a terrible deal. Had the American Indians, however, sold their beads and trinkets, invested their $16 and received 8% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.

Warren Buffett, one of the richest men in the world uses a snowball analogy to explain compound interest:

“Life is like a snowball. The important thing is finding wet snow and a really long hill”

The really long hill referring to the effect of time on the growth of money.

Here is a simple example. If your child saved £10 or $10 per week over their working lives of 40 years and received an interest rate of 5% they would accumulate £61,040. However if they started 10 years earlier, that would be £106,740. That’s a difference of over £45,000 from an extra investment of £5,200.

Given that time can play such an important part in the growth of money, the earlier a child starts his or her savings habit, the greater will be their return. Here are 5 top tips to encourage your child to start saving.

  1. Lead by Example – have a jar or money box where you deposit your spare change. Children learn more by what you do than what you say. By wanting to follow your example your job is half done.
  2. Add interest – when your child is old enough to understand the concept of interest you can act like a bank and top up their savings. Keep the numbers simple by adding 1 coin for every 5 or 10 they save. It’s a good opportunity to introduce some simple yet important money lessons.
  3. Open an account – go with your child to the bank and open a savings account. Then make an event of going and making a deposit. Your child will make positive associations with the act of paying in money.
  4. Save for a purpose – it’s much easier to create an interest in saving (excuse the pun), when there is a strongly desired outcome on the end of it. Encourage your child to save for a holiday, a particular toy or something they value.
  5. Consistency – For saving to become a habit it must be done regularly and often. Then gradually, like brushing your teeth it becomes automatic and habitual. If you give an allowance encourage your child to immediately put some money away. If they get extra for chores or birthdays encourage them to allocate a percentage to saving.

In all the above examples it should be emphasised that for the money saving habit to stick it must be enjoyable and rewarding. The word encourage is used rather than coerce or force. Just as compound interest will reap rewards over time, so too will the investment in time spent to encourage the savings habit in your child.

We recommend the Moonjar system for encouraging children to save. Please visit The Financial Fairy Tales for details

>Financial Education in Schools

>Adapted from an Australian Government report investigating Financial Literacy among women.

Financial literacy programmes in schools: This approach to improving financial literacy is advocated in Australia and internationally, by government and the business sector, because it reaches a large part of the population and is a means to teach basic concepts to young people before they face financial crises or have to make major financial decisions.

There is ongoing discussion about where in the curriculum financial studies ought to be incorporated: mathematics and personal development are two favoured learning areas. Also under discussion are questions of when financial education should start and what should be included (ASIC 2001). While discussions continue, government initiatives have begun in Australia, the USA, Canada and the UK.

Financial education in schools has the potential to allow young people the opportunities listed by the UK Financial Services Authority (1999):

•to develop numeracy, literacy and IT skills in the context of personal finance;

•to develop an understanding of the nature and use of money in its various forms, including credit and debt;

•to learn how to access, interpret, question and evaluate financial information and advice;

•to learn about the consequences of financial decisions and about consumer rights and responsibilities; and

•to learn how to weigh up risks and benefits in order to choose appropriate solutions to particular financial needs.

Such a suite of skills, they believe would equip young people to deal with financial situations as they arise.

One of the main limitations of financial education in schools is that students may have a limited interest in learning about things that have little immediate relevance to their lives. While they may be keen to learn about buying a car, they are unlikely to be interested in superannuation. Further, as the range of financial services and products continues to grow, it is not feasible for schools to provide comprehensive financial education.

The effectiveness of financial education in schools is also affected by limitations on time available and teachers expertise.

>Interesting Article from The Scotsman

>A MONTH after Scotland was nursing its collective Hogmanay hangover, many people will now be nursing a fresh headache as their credit card bills land on the doormat.

According to statistics from insolvency trade body R3, almost four million people in the UK indebted themselves to pay for Christmas and approximately 6.5 million do not have enough money to pay for the subsequent credit card bills.
 
The core issue here is the awful example adults give their children when they rack up so much debt. Kids look to adults as role models in many areas. Why should their attitudes towards personal finance, debt and consumerism be any different to our own?
 
Read the full article here

>Financial Literacy For Kids – Check out the new shop and resources

>In case we haven’t see you for a while there have been a few changes at The Financial Tales.
We have added a selection of free resources and games to help promote financial literacy for kids.

You will also notice our new shop or store depending on your version of English!

Here are the links to purchase Dreams Can Come True in paperback plus The Last Gold Coin and The Magic Magpie in digital ebook format

Click here to go directly to the shop page