Developing goals for spending is something you can do with your child no matter what their age. For younger kids, tying spending goals to items they want to purchase, such as $50 for a popular new toy, can help shape how they think about spending later in life.
As your children grow older, challenge them to set longer-term goals, such as saving for parts of their college education or buying a car. This will get them into the habit of setting aside a larger portion of their earnings and looking beyond short-term purchases.
Show the accumulation
Allowing your children a way to see money accumulate will help them to take a vague concept – such as budgeting – and turn it into a concrete result.
For smaller children, buying a clear piggy bank can provide an effective visual as they consistently add more money. For your older, more tech-savvy children, opening up a savings account will let them store their funds, have a debit card and get into the habit of checking their statements online. This gives them a chance to see the impact of interest on their balance, even though it will be small in a savings account.
This method can teach them about how an interest rate can help grow their funds – and also how slowly their fund balance could increase in a relatively no-risk vehicle.
Dive into an investment fund
For older children who have more long-term goals, it’s a great time to practice the importance of picking the right investment tool. Let’s say your teenager wants to save for a portion of college. Having them take $25 out of their earnings (from babysitting or an after-school job or even an allowance) each week to allocate toward school expenses in a savings account may be a good start.
But taking the same money and investing in a 529 plan that was set up for them as an infant, for example, can give them valuable experience with mutual funds. This provides an opportunity to talk to your kids about evaluating what makes a good fund. Because they will need this money in, say, five years, you can explain that the more stock exposure one has, the more risk they may be taking on. Over time, this risk could pay off, but if you’re tapping the investment in five years, less stock exposure is may also be safer.
Most important, introducing your children to investing exposes them to fees – or the cost of owning a mutual fund. Over the course of a lifetime, a difference in one percentage point in fees can be hundreds of thousands of dollars. The sooner your child understands the impact fees can have on their financial security, the better. The Securities and Exchange Commission also notes that, when it comes to 529 plans, “You should carefully review the fees of the underlying investments because they are likely to be different for each investment option.”