Kids – Savings Hero

Saving money is one of the most important aspects of building wealth and having a secure financial foundation. Yet many of us have learned the importance of saving money through trial and error, and more importantly, experience.

In school, we aren’t really taught about the importance of saving and many of us find that as adults, we have to fend for ourselves.

But there are ways to empower the next generation, and that starts by teaching children the importance of saving from a young age. If you are a parent, here are 6 ways to teach your children about saving money.

1. USE SAVINGS JARS

When your kids really want the latest and greatest toy or a new action figure, let them know they will have to save up for it. Give them a jar for each of their desired purchases and offer them a small allowance each week in a denomination that encourages savings.

For example, if you give your child five dollars a week, give it to them in one dollar bills. They can save all their cash for one purchase, or they can contribute to different “jars” for various savings goals.

To encourage saving up for their short-term goals, put a picture of their desired toy or item on the jar, so they have a visual reminder of what they are working towards.

2. START WITH A PIGGY BANK

A piggy bank can be a great way to teach your kids the importance of saving, while giving them an easy way to do it. Tell your kids that the goal is to fill up the piggy bank with dollars and coins, until there is no room. Illustrate that the piggy bank is for saving money for the future and that the more they save, the more their money will grow.

3. OPEN UP A BANK ACCOUNT

Once the piggy bank is full, take your child to the bank to open up a savings account for them. Have them count how much money is going to be deposited, so they can have a physical understanding of how much money they have. Show them the final number and reinforce the idea of interest.

It can provide a great source of motivation for your kids if they understand that their money will grow over time as long as they don’t touch it.

4. LEAD BY EXAMPLE

Children learn by example, so the best way to teach your child about saving money is to save money yourself. Have your own jar of money that you put funds in regularly. When you’re out shopping, show your children how to discern between various prices and explain why buying one item makes better sense than another.

Reiterate the message that every time you get paid, you save a portion of your check to help prepare for the future.

Teach your kids about why and how you are saving for their college education.

5. START A CONVERSATION

One of the most important things you can do is to start a conversation about money and the importance of saving. Money doesn’t have to be scary or a taboo. Use financial discussions as teachable moments. An innocent question such as “Are we rich?” can be answered in a way that emphasizes family values, such as hard work and responsible spending.

Let your children know they can have an allowance, but it’s up to them to save up for things they really want. In addition, illustrate how much their money can grow over time if they save.

Also discuss the difference between needs and wants and tell your children you are always open to talking about money and new ways to save. Ask them about what they want to save up for. Ask them what they want their future to look like.

Asking good questions can get them to think long-term and have a positive relationship with money. Letting them know you’re always open to have a conversation about money can encourage them to ask questions of their own to keep learning. The graphic below from the JumpStart Coalition for Personal Financial Literacy can provide you with learning benchmarks based on your child’s age.

Teaching kids how to save money may seem like a tough task. It has even been said that parents are more likely to talk to their children about sex than about money. But using these tips, you can make your child’s understanding of money fun and accessible. It’s an investment in knowledge which truly pays the best interest.

6. CREATE A TIMELINE

As a kid, the concepts of money and time can be hard to grasp. Research has shown that the impact of a one hour financial lesson wears off after about five months. In order to make the message stick, money education should be timely and ongoing. If you know your child receives a $50 check for their birthday each year, the moment to talk about budgeting is right before receiving that check.

One way to keep money lessons ongoing is to create a timeline so that your child can visualize when they will reach their goal.

Let’s say you give them five dollars a week and they want to save up fifty dollars. If they saved one hundred percent of their allowance, they’d reach their goal in ten weeks, or roughly three months.

Start by getting a long piece of paper and a marker. Have $0 on one side and $50 (or whatever goal amount) on the other side. Create checkpoints on the paper for when they reach 25%, 50% and 75% of their goal.

Every time an amount is saved, draw a line illustrating how much was saved. Let your kids know that they will get small rewards at each checkpoint. Small rewards can encourage kids to keep going. Visuals are also helpful in illustrating their savings goals and how their money is growing.

Start your kids off right in life by putting money away in strategic savings accounts.

Whether you want to teach your child smart money-management strategies, help them pay for college or set them up for financial success as adults, it’s important to jump-start saving for kids early on. However, it’s critical to use the right account.

“A lot of parents view their home equity as a savings account,” says Jon Brodsky, CEO, USA of finder.com, a personal finance comparison website. “The problem with that is you don’t know if you’ll have access to that money.” If the housing market or economy fluctuates, there is no guarantee you’ll be able to sell your home or refinance to tap into its equity. Fortunately, you can secure long-term savings for your kids with a few strategic methods and accounts.

Here’s how to save money for your kids:

Open a Coverdell Education Savings Account

Similar to 529 plans, Coverdell education savings accounts allow parents to set aside money for education expenses, including both college and private tuition for grades K-12. Contributions to a Coverdell account are limited to $2,000 per year and are not tax deductible. However, withdrawals for qualified expenses are tax-exempt.

Prior to the creation of 529 plans, Coverdell accounts were one of the best ways to save for a child’s college expenses. However, they have since fallen out of favor.

“My advice is: Why not use a 529 plan?” Mahaney says. A 529 plan doesn’t specify a contribution limit and may offer a state tax deduction, which are key benefits a Coverdell education savings account doesn’t offer.

Create a Children’s Savings Account

Most banks and credit unions offer children’s savings accounts which parents can co-own. These accounts can help children develop the habit of saving, rather than spending, all their money.

“The whole teaching aspect of it is huge,” says Sarah Hussain, a product manager at Alliant Credit Union. Parents can set up recurring allowance transfers and children can take an active role in managing their money while earning some interest as well. At Alliant Credit Union, for instance, dividends are paid out on Kids Savings Accounts once the balance reaches $100.

As children age, they may be moved into teen checking accounts and issued a debit card. “The teen Visa debit card (for teen checking accounts) has lower spending and withdrawal limits,” Hussain notes. Parents remain co-owners of teen accounts to help them oversee and assist with money management as needed.

Open a Custodial Account

A custodial account may be best for those who want to save money for their children but don’t want them to have access to the cash until they are adults. The money is held in the child’s name, but “you deposit the money,” Brodsky explains. “You manage the account.”

Custodial accounts may be set up at banks such as Bank of America or brokerage firms like Schwab and Franklin Templeton. They are governed by the Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act. The accounts allow children to own securities or other assets that may otherwise be off-limits for them.

While custodial accounts don’t provide the same tax benefits as other college savings vehicles, they may be a good choice for parents who aren’t sure their child will go to college or who want to provide a financial gift upon adulthood. Once a child reaches the age of majority as governed by their state, money from a custodial account is transferred to him or her.

Leverage a 529 College Savings or Prepaid Tuition Plan

When it comes to college savings, no account may be more valuable or more underutilized. “I’m shocked by the little use of 529 plans,” says James Mahaney, vice president, strategic initiatives for the financial firm Prudential.

Only 44% of parents with children ages 8 to 14 years old are using 529 plans, according to the 2018 Parents, Kids & Money Survey from financial firm T. Rowe Price. That’s despite the fact that 529 plans are widely considered the best savings vehicle for college expenses.

There are two types of 529 plans. One is a general college savings plan that allows parents to put money aside into an account that can be used at any school, including private K-12 institutions. Some states provide a tax deduction for contributions to their state’s 529 plan, and withdrawals used for qualified education expenses are exempt from federal income tax.

The other option is a prepaid tuition plan that locks in current tuition rates for public institutions. While the ability to lock in tuition rates is a valuable benefit, the college savings option offers more flexibility and may be a better choice for most families, according to Brodsky.

Open a Health Savings Account

If you have adult children who are covered by your high-deductible health insurance plan, a health savings account is another option to consider. “It’s the only triple tax-free savings tool in America today,” says Shobin Uralil, co-founder and COO of Lively, an online health savings account provider.

Those with a qualified high-deductible family health insurance plan can contribute up to $7,000 in 2019 to a health savings account. This money is tax deductible, grows tax-free and can be withdrawn tax-free for qualified medical expenses. At age 65, money can be withdrawn for any reason and only be subject to regular income tax, the same as a traditional 401(k) or IRA.

While a married couple can only open one health savings account, each adult child covered by a family plan can open their own account and anyone can make contributions totaling up to $7,000. While there are limitations to the use of this money, having an account dedicated to health care costs can help smooth your child’s transition into adulthood. “The best time to fund your HSA is when you don’t need the money,” Uralil says.

Set Aside Money in a Trust Fund

Though not as common, a trust fund is another way to save money for children. “Most of us don’t have access to (one) because most of us are not that wealthy,” Brodsky says.

A trust fund can be set up with any amount of money, but it usually doesn’t make sense unless you have a large amount of cash to deposit into it. An attorney needs to draw up the trust documents, and someone must be appointed to manage the money. Still, for wealthy families, a trust fund offers more control over disbursements, protects cash from creditors and ensures a child’s assets aren’t split during a divorce.

Use Your Roth IRA

Dipping into retirement savings for your kids’ college tuition may not sound like a smart plan, but finance experts say there is no reason you can’t use a Roth IRA to cover education expenses. “Money needs to be saved for college and retirement anyway,” Mahaney says. Comingling the funds is OK as long as it’s done with proper planning.

A Roth IRA allows people to save after-tax dollars for retirement. In 2019, workers younger than age 50 can save up to $6,000 while those age 50 and older can contribute $7,000. Money withdrawn after age 59 ½ is tax-free, and the principal amount can be taken out at any time without tax or penalty. However, withdrawing any gains prior to age 59 ½ results in a 10% tax penalty. Depending on your age, you could use some or all of the money placed into a Roth IRA for your child’s college education or other expenses. If you plan to deplete the account, make sure you have another source of retirement savings, like a 401(k).

There are income limits for those who want to contribute to a Roth IRA, but Mahaney says high-earning households can use a backdoor Roth IRA strategy to access these accounts. In 2019, the ability to contribute to a Roth IRA begins to phase out for married couples, filing jointly at incomes of $193,000. To get around this limit, they can make a non-deductible contribution to a traditional IRA and then convert to a Roth IRA.

Tag: Kids

Six Ways To Teach Your Kids About Saving Money