If inflation has tightened your household budget, you might think this is not the best time to be talking to your kids about saving money—especially if they're very young. But teaching your kids to participate in saving can pay dividends even in tough times.
Put simply: any savings is better than no savings, and the earlier you start, the better. The longer your child's money sits in a savings account, the more interest they will earn—and the more they will learn about the power of saving.
Give your child a head start
"Helping your children learn about savings at an early age has two benefits," said Bank of Albuquerque® Group Banking Manager Josh Miera. The first is less tangible but perhaps more important: kids who get to practice money management with the help of their parents are more likely to grow up with good financial habits.
"The consequences for making money mistakes are much more serious once your kids turn 18 and are on the hook for rent, loans and other bills," cautioned Miera. "It can be very jarring to join the real world if you don't have established money management skills."
The second, more obvious, advantage is the earlier your kids start saving, the more compound interest they'll earn over their lifetime. "Starting early can really help when saving for bigger purchases later in life like college tuition, a car or a big trip," said Miera.
The timing is also right, Miera said. When inflation rises, interest rates tend to increase as well. That makes it more expensive to borrow money but also means you'll earn more on the money you save. Many "grown up" assets, including certificates of deposit and money market accounts, also benefit from compound interest.
What is compound interest?
Anyone, including babies and children, who have a savings account can earn interest—which is essentially funds the bank pays you for letting them hold – and use – your money. Compound interest is the interest you earn on your interest.
Essentially, your money will grow over time, even if you never contribute another dollar. It is an easy way to increase your savings, and the longer your money sits, the better—which is why understanding the concept of compound interest is such a powerful tool for kids.
But how do you teach your children to save consistently? Especially when they're young and crave instant gratification?
Miera provided a few age-appropriate tips for helping your children benefit from early and consistent savings:
Birth-5 years:
- Start a savings account on behalf of your child that they aren't allowed to access. This money should be for a big, long-term savings goal and can be a custodial account. Put aside any baby shower cash gifts, inheritance or birthday money and watch it grow.
- Once they start learning numbers, you can begin talking about saving and spending at home using real dollar amounts and concepts like "more" or "less."
- Shopping can be a great place to teach about savings starting at preschool age. If you're out and your child asks for a toy, rather than saying, "We don't have money for that," try, "That's not what I want to spend my money on," or "I'm saving our money for our family trip." Model prioritizing purchases and delaying gratification.
6-9 years
- Once kids start learning math in school, they can be more involved in counting and saving money. This would be a great time to help them develop good habits by buying them a piggy bank.
- Help them set some short-term goals. Ask what they want to spend their money on and allow your child to use some of their savings to make exciting (but planned) purchases.
- If you pay an allowance, talk to your kids about how you'll automatically set part of it aside for their savings.
- Introduce compound interest by explaining it with concrete examples. Miera recommended a demonstration with food like apple slices or marshmallows.
10-12 years
- Now's the time to open a joint savings account at a bank for your child. Miera suggested going into the physical bank to make the experience more tangible.
- Consider transferring their allowance electronically to the bank account, but show them the transaction so they're actively involved.
- Children under 13 cannot bank online, so occasionally, print out their bank statements and show them how much their account has earned thanks to compound interest.
13-18 years
- Once they can get a job and begin earning a paycheck that can go into a checking account, help your child set up automatic deposits into their savings account. Miera recommended saving 33% of all earnings.
- Engage them in conversations about how they plan to use their savings, reiterating that the longer the funds are in the account, the more they'll grow.
- Meanwhile, the custodial account you opened will continue to grow, through any deposits you make and the compound interest you'll earn on the total amount.
- You can stay on your child's joint account for as long as it makes sense for both of you. The custodial account becomes your child's property at age 18—but they don't need to spend it immediately! This would be a great time to talk with them about their plans for the money and to reinforce the power of savings.
For example:
| Initial amount deposited | Amount added each year | Annual interest rate* | Years | Final amount saved |
| $100 | 0 | 4% | 1 | $104 |
| $1,000 | 0 | 4% | 18 | $2,029 |
| $1,000 | $100 | 4% | 18 | $4,496 |
*Note: This rate is for illustration purposes only.
As your child's savings accounts get larger, Miera cautioned parents from borrowing money: "It can be tough not to use your child's savings if you need money, especially if they don't need it for a while. But it's important to model leaving savings alone and letting the money grow—that's the only way to access the benefits of compound interest."
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