Where do kids learn about money? At home? At school? The reality is that very little is taught at school about money – perhaps how to add it, make change, and compute a percentage (for tips). Even learning how to balance a checkbook is rarely taught in schools today. So most of what children need to know about money is up to the parents – how to save it, how to make wise investments, how to spend money wisely, and more.
Children need to learn how to save and how to spend money wisely. Of course their first lesson begins with their parents through modeling and mentoring.
Children should learn how to save their money – some of which should be discretionary and some should be set aside for a specific – long term goal (college or other). One way to do this is to take a certain amount of money, paid monthly, and separate it into 3 – 5 areas. The first could be for growth – long term savings – perhaps for college or for starting business in the future. This can be put into a savings account – more about this later.
The second can be for short term planning – to buy a bicycle, for example, or other large item that is desired (but not required) on the part of the child. A third could be an amount set aside for the child to use for fun – buy candy or a small toy each week – or whenever desired (and the money is available – i.e., has not already been spent that week or month). Finally, there might be an amount set aside to help others.
Opening a bank account for a child has other benefits other than long term savings. Children can learn just what those banks that they see their parents going to does. They can begin to learn about interest earned (although the interest rate these days is very low). They can learn how the bank keeps track of their money – perhaps a passbook. They can learn how to make a deposit (or possibly a withdrawal.)
Older children can learn what the bank does with their money. (Do they keep it in a big vault? No, the bank loans the money to other customers – who pay more for the loan that the bank pays you for the savings account and then the bank, can make money.) Children can learn when and why the interest rates go up and/or down, the effects of compound interest. They can learn the liquidity of the investment – if they can take the money out at any time, or if it needs to be left in for a specific amount of time, and the relationship between the interest rate and the liquidity of the investment – higher interest rates are paid if the money has less liquidity. Why? Because the bank can use the money for a longer period of time.
Teaching kids about money can be a rewarding experience for both parents and kids together if it’s done in a positive and encouraging manner allowing them to really understand the concept of saving money. Opening a kids savings account is just one method of doing this, along with modeling financially sound behavior; it will all lead kids to make wise investments and spend money wisely in the future.