How To Raise Kids That Manage Money Better Than You Do
The Single Most Effective Tool To Inspire Kids To Become Expert Savers.
Our plan was to teach our kids how to save money so they could put themselves through college and make financial choices that would direct their futures.
We were living our dream, traveling the country in an RV with three kids, no house payment and adventures every day, but we were on a tight budget. We could only continue our travels if we spent less than we made, and had some savings. No way could we put three kids through college with our cash flow.
While combing through books of parenting advice, I stumbled on a bizarre idea. Pay your kids interest. LOTS of interest. Incentivize them to save money. We couldn’t come up with hundreds of thousands of dollars to give our kids the college education we wanted for them, but we could afford to pay them 10% interest each year. If the kids became expert money managers, they could choose their own paths, whether that was to invest in college, buy a home, or build a business.
Just how did we transform from typical suburban family life to traveling the country in an RV for 12 years? Read “How We Capitalized On Our Financial Blunders.”
Interest is the most powerful tool you can use to teach your kids to be proficient savers. When our three were old enough to start their own savings accounts, we made them a deal: for every dollar that is in your account at the end of the year, we will pay 10% interest on the entire balance.
We set ground rules to make this work for our family, discussed the plan with the kids, and answered all of their questions. Our basic guidelines:
- This is the child’s account. A parent is joint-owner, but the savings here belongs exclusively to the child.
- The child has absolute control of how much gets added or taken out.
- This deal is over if any money is removed. Wait, what?! Isn’t that controlling?
Definitely not, and here’s why. This account is for saving money, not spending. Kids need to have their own spending money kept separately in a piggy bank, an envelope, or a separate savings account. This is one of the most critical tools for teaching kids how to budget. The kids decide how much money they want to keep out for spending, and put into this savings account only the money they want to stash and not touch. Parents have the right to stop paying 10% interest once the child makes a withdrawal.
Were there ever any exceptions to the “No Withdrawal” rule?” You bet. This type of arrangement can be flexible, and open to discussion. You could, for example, make a deal that any year a child withdraws money there will be no added interest. The right guidelines are the ones that work for your family. The foundation of teaching kids about money is talking about it, which starts long before the 10% interest account discussion.
We decided our oldest two were ready for 10% interest accounts in 1998, when Christine was 9 and Jake was 7 years old. Well, our nine-year-old was ready, and our seven-year-old was doing everything his nine-year-old sister was doing. We began to discuss it by talking first about what it meant to put money into a savings account in a bank, and why we had our own savings accounts. We explained that it was a safe place to keep money, and that it encouraged us to make a thoughtful decision if we wanted to take it out (this was back before ATM’s were around every corner, when we had to actually go to the bank to make a withdrawal). Plus, the bank paid us 1.5% interest for keeping our money in the account.
We had been saving money the kids had received as gifts from relatives since they were born; Christine’s envelope held about $500, and Jake’s had about $300. We had to explain the difference, of course. Christine had more money because she had received two more years of gifts. When Jake reached the age of 9, he would likely have a similar amount, or more if he chose to save more. We would use this money to open each of the kids their own savings accounts. Sam, our youngest, was only four years old. We chose to open a savings account for him at the same time that we opened them for his older siblings, but held off on the interest discussion until he was ready.
We used a “What If” scenario to help Christine and Jake understand interest. “If I put 100 dollars in the bank today and don’t take it out or add any more, the bank will give me another $1.50 in one year. It’s not a lot of money, but I didn’t have to do any work for that. And if I put $500 in the bank today, the bank will give me $7.50 next year.” This is an over-simplified explanation, of course, but it’s a start. Next comes the best part. “We don’t think 1.5% interest is enough. We want to encourage you to save as much of your money as you want, so we are going to give you 10% interest every year on this savings account. That means if you have $100 in the bank, we will add $10 at the end of one year. Plus, the bank will give you 1.50. If you add no more money, you will have $111.50 after one year.”
Naturally, Christine asked how much she would have at the end of one year on her $500. I could see the understanding on her face as her eyes grew big at the numbers: $500, plus $50 interest from us, plus the $7.50 from the bank equals $557.50. We discussed how much they would have after two years, and what would happen if they added their own money to the amount that was growing. Our kids grasped the impact of compound interest as the funds in their accounts increased by 10% jumps every year.
We also had to carry through with those interest payments. That first year we added $50 interest to Christine’s account, and $30 to Jake’s. Both kids were eager to add money to their savings, anticipating their growing interest payments.
It got more interesting a few years in, when the kids started to create ways to earn money to add to their savings accounts. Our $50 interest outlay grew to $500. Later, when our interest payments for all three kids totaled over a thousand dollars we began to budget so we could pay them. One of our last checks to Jake was over $2,000. At 18 years old, he had over $20K in savings.
Why would you want to pay your child a thousand dollars in interest for one year? That is exactly what you want, because that is success. If a year comes when you owe your child one thousand dollars, you have incentivized your child to save ten thousand dollars. When this money goes towards a college education, a house, or a start-up business, you’ve paid only ten percent of it. It’s like getting TEN TIMES return on your investment.
Give a kid a fish…or teach that kid the skills to control their future. Christine and Sam now have college degrees that they paid for themselves. Those degrees mean considerably more than if their parents had paid the bill. Jake followed his dream to build and race high-performance cars; once he reached $30K in savings, he would not let it drop below that. He called it his “comfort zone.”
The 10% interest account is a tool to teach kids how to save, but that’s only part of the plan. We also need to teach our kids how to earn money, and how to spend it. Our children certainly did not pay for an entire college education with their savings accounts. Based on financial need, Christine and Sam qualified for grants and deferred-interest loans; our daughter received additional private grants and tuition assistance from the college she attended. Because they were experts at saving, any college debt they took on was paid off within one year of graduation.
That 10% interest investment in our kids returned ten times over. Short of inventing a time machine, nothing could get you that kind of a return. You certainly could not get that return with stocks or bonds. By paying them to save their own money, we gave them the opportunity to master one of the critical skills that would direct the paths their lives they would take.
Download the 7-page PDF that includes specific details on rules, steps, and mistakes to avoid. If large interest payments are scary, there is a solution for that, too.
The 10% Interest Account Guide is free: RebeccaHollinger.com/Smart-Money-Kids
Yesterday was the best time to start, but today is a close second.