Earlier this week, I was the guest speaker at my son’s Cub Scouts meeting. My task was to sit down and speak to this group of second grade boys about budgets and saving money. I was fascinated and impressed by how easily they grasped the concept of putting money away in a bank and even nodded when I explained how interest compounds (I used different words) if they leave the money in a bank, instead of taking it out whenever they want something their parents won’t buy them.
Yet, here is the disconnect: What they could not really get a handle on was that their $100 savings account would not “grow” to $200 by the time they wanted to buy themselves a present, usually in the form of some electronic device. They also had a tough time letting go of their money, which may explain why one 9-year-old I know keeps hundreds of dollars in cash stuffed in a little box by his bed. I even tried to explain that when their parents go to work, they must use some money to pay for different items, a lot of which goes to them. They kind of shrugged it off. Do they think groceries, gas, new clothes and Wii games appear by magic? Maybe so.
So, I tried a different approach. I asked them to imagine what it would be like if their parents gave them $100 allowance each month. They thought that was a wonderful idea. I then told them that they had to give most of it back because they had to pay to live in their house, to eat their food, to use the shower and lights and to go to sports and guitar lessons. All of their jaws dropped at the same time, but I think they grasped the concept.
I moved to budgeting and introduced a pie chart to them. We divided the pie chart into all the items they may spend the $100 on — food, lodging, sports, games, vacations, charity, savings and spending. After we separated out the essentials such as food and lodging, and took a little bit extra out for charitable giving, we came to the conclusion that they would have $20 left each month. Each then drew his own pie chart and apportioned the $20. One or two put about 90 percent in savings whereas others evenly divided the $20 into many segments.
The majority put a little away for savings in a bank, kept a little more for an item they wanted to buy short-term and spent the rest on themselves.
As I walked out of the session, what struck me most was how these young boys were so reluctant to spend their money. Given this, how can parents help these youngsters set expectations about savings? We can start talking to our younger children now and explain how saving some of their own money today can potentially make it grow so they will actually have more in the future.
Some of the kids spoke about saving the money for college. They are on the right path and their parents and/or teachers have already planted some seeds to help them establish a savings mentality. That’s the good news.
The challenge is this: how can we prevent kids from becoming discouraged when they ask about their account balance or how close they are to their goal? If they invested $100 about 18 months ago and earned maybe 1.2% interest, they would have a whopping $101.82 in that account today.
One solution may be to help them out a bit. If you offer to match anything they put into the account on a weekly or monthly basis, they will see their dollars grow a little faster.
This material is for informational purposes only and is not intended to provide specific advice to any individual. Please talk to a financial adviser prior to purchasing any investments.