This is the second part of our “How to teach kids about money” series.
When you think back to saving money as a kid you probably remember some type of piggy bank. When it came time to spend your savings you either unscrewed a plastic stopper and dug around for your coins or smashed it into 100 pieces to expose all your money.
The piggy bank is such a simple toy but it can be a powerful teaching tool to show young kids advanced concepts of money. It’s a place to store your savings out of sight, easy to access, inconvenient to withdraw from, and a visual reminder of the progress you’re making to your goal.
But in order to get your kids to use their piggy bank, they have to understand the importance of saving. So here are two things you can do now to instill the value of saving in your kids to help them now and for years to come.
Set Goals With Them
Talk about goals with kids. Explain the difference between short-term and long-term goals and write down some of each with your child. Seeing their goals on paper can help them stick with them and avoid spending their money on impulse.
Goal-setting also teaches children perseverance which can help them work toward better grades and improves skills in sports.
When your child earns money or gets a cash gift for their birthday or holidays, encourage them to save some to put toward their goal before they spend it. Teaching them to save first will ensure they adopt the habit of saving before spending.
Eventually, you can switch from a piggy bank to several jars labeled with their savings goals and then a kid’s savings account at your local bank. These progressions will encourage kids to make bigger goals as they get older.
Show Them The Magic of Compound Interest
Compound interest is often thought of as a complex topic that should be taught on a college level. The truth is that while investing can get complex, compound interest is actually a very simple concept of managing money.
A reader of The Simple Dollar used a two-month experiment to teach his young children about how compound interest impacts your savings. He started with 10 pennies in a bowl and added 10% interest to it every day, one penny for every 10 in the bowl.
He had his kids guess how much money they thought would be in the bowl at the end of the experiment. They guessed one or two dollars.
The first 10 days he added one penny and on day eleven they were at 20 pennies so he began adding two each day. He was putting in three by day 16 and four by day 20. By the last day, day 61, he was putting in just under $2 in the bowl and had a total of almost $20.
The experiment is the perfect example of how when you save your money in the right places and leave it there for as long as possible you don’t have to do much for time to grow your money faster than you can earn it.
Find out more ways to teach kids about money in the 3nd installment of our “How to teach kids about money” series: Spending Money.
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