Financially Savvy Kids

Savings accounts are the first thing most people think of when they want to teach their children to save. Most parents start some type of savings account at an early age to incentivize saving over spending. I did this for both of my children to teach them about saving. The most common accounts opened are with credit unions and banks. In reality the actual type of institution doesn’t matter. Look for one that is kid friendly to help associate positive memorable feelings with going to the bank. Early in life your child’s mind is associating feelings of good and bad with everything they see and do. A crowded, smelly and run down bank will not develop a sense of pleasure in a child’s mind. In the same way you teach them firefighters are good people you need to associate the bank with those same positive feelings.

Pay attention to promotions for children when you go to open an account. Many banks and credit unions will match up to $500.00 of initial investment. The credit union we signed up with had a reward system for the kids. They had a deposit book and every time they made a deposit of $5 or more they got a stamp. After 10 stamps they got to choose a reward; such as movie tickets. Many financial institutions have kid friendly programs. At an early age it is more important to have a friendly neighborhood place where you can walk in and ‘experience’ the bank. This will help to build and associate a positive relationship mentally.

When they get a little older it is important to start to teach them about the different types of financial instruments. In most instances a credit union will give you better loan rates and a general higher interest rate on your balance. The price you pay with a credit union is in accessibility. You likely will have only a few brick and mortar places to go and talk to a human being and they won’t exist beyond your local area. This difference between banks and credit unions is still important to differentiate with children. Access was a big thing 30 years ago but in today’s society many people perform all their banking functions online, with institutions that have no physical location, so needing to have access to a brick and mortar institution is not always necessary but some people prefer to see a human when dealing with their finances.

Most parents stop teaching children at this point. They opened a savings and a checking account (which is also going the way of the dodo), explained the basics, and call it good. Very few consider opening up investment accounts or even retirement accounts for their children. This is where the rich have the advantage in teaching their children about the financial system and how to make their money work for them.

A recent Wall Street Journal article points out the benefits of starting a Roth IRA early.^[1] Last year I finally started a ROTH IRA for both of my kids. My youngest, who was 9, earned money doing typical summer jobs of mowing the grass or watering plants for a neighbor while they were away. He only netted $20.00 that could be put towards income but that will now grow tax-free for the rest of his life. I intentionally started the ROTH IRA for my oldest, who was 15, and was making a little more money. He only brought in about $150.00 his first year but I made the contribution to his ROTH IRA to instill how important it was that I was willing to invest in his retirement. He now has his first ‘real’ job and we will max out his IRA contribution based on his total earned income this year and has a 401(k) started at the grocery store chain.

None of this happens by accident. Research from the University of Cambridge found that children’s money habits are largely formed by age 7 — long before any classroom lesson in personal finance.^[2] The same study found that learning from experience is always more powerful than learning through instruction. Children are naturally motivated by participating in “adult” activities alongside a parent — the familiar habit of going to the bank, watching you compare interest rates, or simply seeing a deposit book fill with stamps provides all the meaning a young child needs to associate positive feelings with saving. That is why the kitchen table beats the classroom. Financial education doesn’t start with a high school economics course. It starts with a savings account, a deposit book, and a parent willing to explain why the credit union down the street offers a better interest rate than the big bank on the corner — and why you are choosing that option.

The earlier you start these conversations, the more natural they become — for you and for your children. You don’t need to be a financial expert. You just need to be consistent. The Cambridge researchers concluded that for children it is the basic approaches and skills which are modelled, discussed, and demonstrated by their parents — not formal financial curriculum — that are the true “levers” for instilling lifelong financial habits. Open the account together. Let them feel the weight of coins going into a piggy bank. Show them the balance growing. Those small moments compound just like interest does, and they build the foundation for every financial decision your child will make for the rest of their life.

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