First Person: Teaching Kids to Save

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Kids get income flowing in from many different sources: birthday cards from Grandma, part-time jobs cutting lawns and running lemonade stands. For many kids, this money flows through their fingers quickly and is spent on items that won't be remembered in six months. When my kids first started getting their own money, they wanted to spend it on whatever was trendy at the time: Pokemon cards, My Little Ponies and Gameboy games. Now, they understand the importance of saving.

Financially-wise kids will save a portion of every dollar that comes in, setting them up for solid lifelong money skills. For every money-smart kid, there is a fiscally-responsible parent who taught them how to handle their finances. Here are four steps to teaching your kids how to save their cash.

Help your kids set savings goals

There is nothing that will turn kids off of saving money faster than making them save it without an end goal. Talk to your kids about the difference between short term savings goals and longer term ones. A short term goal is something they want to purchase in the next 12 months, such as a new bike or a CD player. A long term goal may be their first car when they turn of age or university tuition. Both types of goals are important and will give kids experience with the various types of goals they will need to make when they are adults, such as saving for a vacation versus saving for retirement.

Set a percentage of income to go in each "jar"

For younger children, it's important that they can visualize their money growing. A bank account balance disassociates kids from the value of money, although it is more realistic for older kids. Set up a series of three containers or jars for young children. With your child, decide what percentage of the money coming in will go to current spending, short term savings and long term savings. With my kids, it was 50% current spending, 40% short term savings and 10% long term savings. They often adjusted it on their own to take some out of spending and put more into short term savings when it was something they were really excited about. Once you have the percentage set up, it applies to all sources of income, which gets automatically split up when received.

Give them a visual gauge of how much they are saving

The jars will give younger children a sense of how much their savings are growing. Likewise with bank account balances for older children. However, to give younger children a better sense of growth, tape a piece of paper on to the jar and write the balance of the fund on it. Stroke it out and write the new balance every time your child adds to it (or get them to do it to practice their adding skills). This shows them how far they have come.

Discuss the pros and cons of changing savings goals

Savings goals can change over time and that may be the case for your kids' goals. Instead of that game console they were saving up for, perhaps now they want an electric guitar. Changing goals is a normal part of your financial life- as long as the decision is well-thought-out. Talk to your kids if they want to change their goals. Have them work out what the advantages and disadvantages of the change might be. For example, it may take them longer to save up for the new item or it may be something that will still have value when they no longer want it. Help them to make the best decisions they can every step of the way.

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