Saving kids
By Peter Andrew
To my late maternal grandparents, the Great Depression wasn't history. They lived through it. And, although they fared better than most during that difficult time, they were from a generation that learned to value financial security above almost anything else. I can still remember their taking me, age maybe six or seven years, to open my first savings account. My dad's much older brother had a similar attitude, and made it his unbreakable rule never to save less than 50 percent (seriously!) of his income every month. Clearly the saving habit flows through my blood.
Nature and nurture
However, in what may be a triumph (or more likely disaster) of nurture over nature, saving has played little part in my life. Should I blame my parents? They were fairly affluent and never experienced much hardship or financial insecurity, so they never saved much themselves -- at least until later in life. And they never particularly encouraged me to do so either.
No, it's not mom and dad's fault: They lived their lives their own way, and it worked well for them. But, if they'd realized, all those decades ago when my sisters and I were growing up, just how much some financial discipline would have benefited us, I bet they'd have worked harder to make us savvy with money. Today, I envy people who have good financial skills and habits, and if I had kids now I'd definitely do my best to equip them well, even if it were on a do-as-I-say-not-as-I-do basis.
Deferred gratification
At the heart of good financial practice are three related learned behaviors:
- Deferred gratification: a recognition that some pleasures can be enhanced if you wait for them, especially if that postponement saves you from negative consequences. For example, acquiring a new luxury after saving up for it can be more pleasurable than getting it instantly if that saves you the interest payments and nagging guilt that come with credit purchases. Equally, denying yourself some things now so that you have a comfortable retirement is plain smart.
- Impulse control: being capable of fighting against the emotional instinct to act instantly, regardless of the consequences. Those with good impulse control rarely make spontaneous purchases or rush important decisions.
- Differentiating between needs and wants: some of us (hands up here to this one) are good at kidding ourselves that something is a necessity solely on the grounds that it's shiny or new.
Teaching the next generation
A number of academics believe that those three behaviors are lacking in certain people, because some brains are hardwired to be resistant to them. However, even those scientists who take this view acknowledge that good teaching can help.
One, Prof. Hersh Shefrin, Ph.D of Santa Clara University, draws an analogy between financial competence and athleticism. Some individuals are born with enormous sporting talent, and, with coaching and determination, can become Olympians. Others are born with very little ability, and could never become world-class, no matter how much time and effort they put into their ambition. But even the ones with the very least natural potential can get better with training. So it is with financial behaviors.
What you can do
As my grandparents discovered, opening even the best high interest savings account for a child isn't in itself enough to ensure he or she develops a savings habit -- though it's a start. What's needed is a continuing teaching program, with constant reinforcement and regular celebratory rewards for progress.
The Consumer Financial Protection Bureau suggests a number of steps suitable for kids of different ages. These include:
- Set up three jars for a child: one for savings, another for spending and the third for giving. Make sure he puts a little in each every time he receives money.
- When your child wants a new toy, don't say no. Encourage her to save up for it.
- Open a savings account, and take the child to the bank to transfer the contents of the savings jar into it three or four times a year. If you choose an online account, have him watch you set up deposits. Either way, track progress with him.
- Set short- and long-term savings goals, maybe for a coveted toy, a bike or vacation treats.
- Consider making matching contributions to motivate the child. Maybe your putting in a dollar for each dollar saved is a bit much, but a quarter for each dollar saved might build enthusiasm.
- By the time your kids reach high school, they may have part-time jobs and more available cash -- and more spending temptations. Keep up the pressure with more ambitious savings goals -- a car, maybe, or a proportion of expected college costs that your child will need to cover.
- By this time, you are probably able to sit your child down, and run through some alternative spending/savings models. Use online credit card calculators to demonstrate how much more money is going to be available in the future if the choice to save up is made.
A good financial education may be the most valuable gift you can give your kids. Start early and begin by searching online for games, apps and ideas that can reinforce your teaching. There are plenty available. If only they had been around when my grandparents wanted to teach me ...
Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business, TheStreet and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.
