The Financial Fairy Tales Blog

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