Teaching Kids to Save

Editor's note: This column originally was published in February 2013. We are featuring it again because April is National Financial Literacy Month and April 23 is Teach Children to Save day.

I like to browse the Web to see (and possibly comment on) what other people are writing about kids and money. Recently, a post by Sierra Filucci, a senior editor with Common Sense Media, caught my eye. Sierra reported that her 6-year-old son was "completely obsessed" with a virtual-world app called Tiny Monsters, and he wanted to make the monsters grow bigger by making an in-app purchase with real money. Sierra’s problem: Should she allow her son to spend his $1 weekly allowance on the game?

Sierra reasoned that if we’re moving toward digital payments for everything, wouldn’t that teach her son how to manage money in whatever form it comes? But her husband disagreed. If their son didn’t actually hold the dollar in his hand and hand it over to someone, how would he understand that the money was no longer his?

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In the end, the couple decided not to let their son use his allowance on the game -- at least until he acquires more experience spending his money on tangible goods and is old enough to think through his financial decisions (and realize when he’s being manipulated).

Good for you, Sierra. At age 6, your son still needs time to gain mental and financial maturity. Plus, tangible transactions help kids at any age learn to manage money.

Savings goals. That goes for saving as well as spending, and it’s something to keep in mind as we observe America Saves Week from February 25 to March 2. Saving may be a virtue, but it’s tough to do -- or teach -- in a vacuum. Don’t expect your 6-year-old to grasp why it’s important to save for an abstract concept such as college, which is difficult to explain and far in the future. (One of my friends once told her then-6-year-old daughter that she would have to pay a 10 cent fine for an overdue library book out of her own money. "There goes my college fund," her daughter said.)

But young children can learn to put aside their coins for small, easily attainable items -- such as a toy or, when they’re older, possibly a gift card to use for an app. To make the goal even easier to grasp, you can attach a photo of the coveted item to a savings bank and watch the money add up.

It’s even possible to make virtual saving more real. One parent who replied to Sierra’s post noted that her children’s virtual allowance is automatically deposited into their savings accounts. They can see the balance on her phone, and when they want to make a "withdrawal," she says, "we make the transfer on my phone from their account to mine and give them cash. They love watching their balance grow week to week."

The big payoff. Once children are about 8, they can understand how a bank savings account works. Just make sure you explain that even though it looks as if the bank is swallowing up their hard-earned cash, they can still get their money back. In response to one of my previous columns about saving (see Getting Kids to Start Saving Money), a reader noted that it’s important to follow through by "reviewing the bank statements and learning about the magic of compound interest."

Unfortunately, whether you get a paper statement or view an online balance, today’s piddling interest rates don’t give children much encouragement on that score. But you can get the message across with another hands-on tool: an online calculator like the one at Moneychimp.com that lets kids see how fast money can grow at different interest rates.

Finally, let kids spend the money once they’ve achieved their goal. Don’t spirit the cash off to the bank or try to talk them out of making their purchase. Once they see their empty piggy bank, they’ll have an incentive to start all over again.

Follow Janet's updates at Twitter.com/JanetBodnar.