Wednesday, November 04, 2015

How to Teach Kids to Save When Interest Rates are Low

I was thinking about how I started learning to save money when I was a kid. At some point, my parents opened a savings account in my name, and I had a nice little bank book. No ATMs back then-- you had to bring your bank book to the teller, who would record your transactions in it. When I got money as a gift, or from my first babysitting jobs, some of it went into that savings account. 

I understood how savings accounts worked: you put money in the bank and the bank paid you interest. I was a kid in the late 1970s/ early 1980s when interest rates were high-- as far as I can remember, my savings account earned about 8%, and knowing that I could be paid 8 cents a year for every dollar in my account was actually meaningful to me-- I was earning money just for letting it sit there!

8% savings account interest seems outlandish today, and I wondered if my memory was correct. I think I am right-- the prime rate back then was between 10% and 21.5%! Today it is only 3.25%, where it has been since 2008. The average interest rate on a savings account today is only a fraction of a percentage point.  You might see a teaser rate of 1% or so, touted as if it's the best thing ever, but it will only be for a limited time, and only for opening a new account. 

So how do you get a kid to see the value of saving if you have to tell them that they will only get a fraction of a penny for every dollar they put away? You could try to teach them about investing in the stock market instead, and I do believe there is value in that, but it is a lot more complicated, and involves so much more risk. 

I would love to hear from readers with kids abut how they've handled this with their own families!


guacandchips said...

Long-time lurker, first time poster. Thank you for keeping up with your blog, I've found it to be very interesting and informative over the past 7 or 8 years that I've followed it.

I have a 7-year old son and it is a definite challenge to teach him about the value of compounding interest in a savings account. Part of it is having to be a really good actor. I make it sound like the 0.75% interest he is earning in his on-line savings account each month is a really big deal. On a roughly $140 balance that he has, this equates to about 8 or 9 cents a month. Technically he is of course losing money each month in the long-term as the inflation rate will almost certainly average more than that over time, but that's a topic that I'll deal with when he's a little older.

His allowance is divided up into thirds. 1/3 he can spend as he chooses to, 1/3 gets set aside for saving up for a big purchase and the remaining 1/3 gets put into this savings account. There was a lot of excitement on his face when the interest pay out jumped from 8 cents to 9 cents per month last month because of his continual investments and resulting higher balance. In his mind it is neat to see the money grow to be a little bit more with each passing month. It certainly outperforms his piggy bank and he sees that. Once the interest rates start to climb he'll be absolutely floored with the increased interest each month.

In time I'll probably start an account with him on or maybe open up a Vanguard account with him in mind just to show him some of the potentially more lucrative options out there, but that's probably still a couple of years away.

Anonymous said...

I have opened savings accounts for my kids when they turn 12 and I match their contributions dollar for dollar. They aren't allowed to withdraw anything until they're 18. (which to them, seems like an eternity)

Once they turn 18, they have the concept of a 401k down, and they realize that systematically contributing a little makes a big difference in the end.

We don't dictate that any amount MUST be saved. Even the spendthrifts are learning the lesson (the hard way) from their frugal siblings.

Vards Uzvards said...

We opened savings account for our son when he was in elementary school (as part of Washington Mutual's WaMoola for Kids program), and were contributing dollar for dollar (more like quarter for quarter, initially). We never prohibited withdrawals from that account, but I don't remember whether our son did any, until, of course, the Washington Mutual bank went under, and all its accounts and branches were acquired by Chase. Several years later, while in hight school, we opened a Roth IRA account for the kid, and initially were also matching his contributions, not as generously, but still...

For a different approach on teaching kids how to save money (APY, and contribution matching) you might want to read this blog post:

bankruptcy advice said...

Stopping "buy on demand" with my kids helped. I give them the money instead and they have to hand it over instead. Seems to make them think twice about whether they really want to buy something.

Unknown said...

I think teaching kids about their finances should be done regardless of how the economy is working. It's all about inculcating a good habit so that they don't squander all their money when they are earning in adulthood!