Teach Your Kids to Be Super Savers

4 min read

As parents, we have a unique responsibility to pass down financial wisdom to our children. Kids don’t inherently know what money is or how to handle it when they are young. They certainly won’t care about saving any of it. What they do learn is by watching how their parents and other family members handle their own money. It is the parent’s responsibility to set a good example of how to responsibly manage money as well as how to save and invest it for the future.

Start Teaching Them Early

One easy way to start is by showing them what saving money actually looks like. Using a savings jar, you can teach them that when they receive any money from gifts or earn it by doing chores, they can place some of it (or all of it) in the jar and watch it slowly accumulate over time.

This is a very basic concept of saving, but it is important for children to be able to see this process visually and understand this concept early on to help them become lifelong super savers.

Going Beyond the Piggy Bank

To move from a basic piggy bank saver to a super saver, requires also teaching your kids about the power of compounding interest and how they can use the 55+ years of time before they reach the early retirement age (59 1/2 years old) to ensure they will have more than enough to live from when they need it. You can teach them that when you put money back to work and give it a job to do, it will make them even more money over time. Money sitting in a jar isn’t doing any work, its lazy money and it is not going to ever make them more money.

To help them solve this problem, you can open a Roth IRA Custodial Account (this is an individual retirement account for minors) which is available through most major brokerages such as Fidelity or Charles Schwab. There is no minimum age to be able to open one for them. According to the IRS, they just need to have a social security number and some type of earned income. For every dollar they put in their savings container, you can put the same amount into the Roth IRA on their behalf. If they earn extra money doing chores, babysitting, doing yard work for a neighbor or running a lemonade stand, you can add that money as well.

Take their jar once they have added their money and put it in a safe place. Every time you are doing this tell them you are going to help them put their money to work by investing it so it will earn even more money automatically. Then every few weeks or months, pull up their IRA account on your phone, tablet or computer and let them see how much their money has grown. As it grows, it will help encourage them to continue to save (and invest) even more money, knowing that if they put their money to work it will grow even more for them automatically.

You can even help encourage your kids to save more by offering to match what they save dollar for dollar (which you were already doing but it helps to make a point of it). Tell them for every dollar they choose to save you will match that and invest it for them in their IRA for later in life. You can also put all the money they saved in their savings container into the bank (hopefully in a high yield savings account) and let it earn compound interest as well. It would still be available to them should you ever need to pull out some (or all) of it in the future. Meanwhile their invested savings in their IRA will continue to compound and grow automatically.

Supercharging Their Savings

If you (or grandparents) are able to help save at least $10,000 in your child’s Roth IRA by the time they reach age 10 (that’s about $167 per month for 5 years) and do not contribute another dollar from that point, by the time they reach age 60 they should have more than $1.8 million available at retirement. This is assuming you invested the money into a low cost ETF or index fund that has an average 11% annual return and allowed the money to compound for at least 50 years. If they left the money alone for another 7 years (57 years total) to reach the “normal” retirement age of 67, they would have more than $3.8 million. This money will continue to grow and compound as long as they live. When they are ready to begin taking distributions, it will be completely tax-free income!

Note that in order to contribute to a custodial Roth IRA for your child, they would need some kind of income. Legally if you run your own business, you can issue them a 1099 (and deduct what you pay them from your business income) and as long the total amount they earn in a year is less than the IRS required minimum they won't have to pay any taxes. If they are not able to obtain a 1099 and their income is from other types of work such as babysitting or mowing lawns, you need to keep a detailed record for them of where they earned the money and when and who they did the work for.

Looking for more information on preparing your kids to be financial superhereos? Checkout the Super Savers book.