If you have children or grandchildren, or if you have a special relationship with your niece or nephew or the child of a dear friend, you can enrich their lives in many ways. One of the most important things you can teach is how to manage their money and invest for the future.
The Three-Jar Allowance
To learn how to manage money, children need some money to manage, typically from an allowance you provide and eventually from doing small jobs for friends and neighbors. As a first step, you’ll have to decide how much the allowance should be and whether it should be linked to jobs they are required to do.
As fair warning, both are matters of heated debate, so it’s worth doing some research and weighing what you’re comfortable with. For example, if you expect an older child to use some of the allowance for necessities, like clothing and school supplies, you may decide she needs a larger amount than if you’ll be paying those bills yourself. Whatever you decide, though, remember that the overall goal is to use the allowance as a way of teaching how to create a spending plan and live by it.
The overall goal is to use the allowance as a way of teaching how to create a spending plan and live by it.
One popular suggestion, especially for younger children, is to illustrate the concept of budgeting by using three clear jars that represent current expenses, short-term savings, and long-term savings.
Separating cash into jars makes it easy to compare the results of spending and saving. But don’t wait too long to open a savings account for their short-term savings and an investment account, for their long-term account. Check with your bank or credit union about how to handle accounts for minors.
If you want to encourage charitable giving, you can use a fourth jar, set a fixed percentage of the total, such as 10%, and encourage putting money in that jar as well.
Spending V. Saving and Investing
To help children decide how much should go into spending and how much into saving, you can help them figure out how much they’ll need for regular weekly expenses, such as lunch money or whatever else you agree on. You might suggest keeping careful track of a week’s worth of spending and use that amount as a starting point. Part of the conversation should focus on the fact that budgeting always involves making adjustments. The goal isn’t to get it right the first time, but to come up with a workable allocation of money.
Next, talk about money for short-term savings goals. Children’s goals vary substantially, based on their age and concept of time, but might include toys, sports equipment, electronic devices, special clothes, or other big-ticket items. You may want to suggest saving for one item at a time and help them figure out how much they’ll need to save each week to reach their goal in a realistic amount of time. But you’ll probably want to let them discover for themselves that not all goals are worth the time and effort it takes to reach them.
Children’s goals vary substantially, based on their age and concept of time.
Finally, be sure to encourage them to set aside a regular percentage for some long-term goal, however vaguely defined. For some children, saving for college means a lot. For others, the goal may be more tangible, like a car. Here, too, 10% of the total might be a reasonable percentage to save. As an incentive to put money into long-term savings, you might consider making a matching contribution by adding 50 cents or a dollar for every dollar your child puts in.
Any opinions are those of Banzai and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Raymond James is not affiliated with and does not endorse the entities mentioned above.
Emergency Savings