Saving money is good; saving for something special or to gain security is even better.

Learning to spend money wisely is a lesson most parents want to pass on to their children. However, when it comes to teaching their children how to save money, they are sometimes at a loss as to how to do it.

There are many questions to consider, such as:

- How much to save?

- What earnings should be used?

- What money is good for saving?

- What money is good for spending?

- When to start?

- What are the rules?

To begin, there are no definite rules as to how old a child should be before they learn to start saving their money. The rule of thumb is that when a child shows interest in money or an allowance, it is time to begin. In reality, when a child wants something that they do not have the money to buy, the time has come.

The rules of how money can or cannot be spent is up to the parent(s) and their lifestyle.

Income

As with most life lessons, you begin at the beginning, with income. Children as young as two years of age have been known to earn an equitable allowance for doing chores as simple as brushing their teeth, helping set the dinner table, and cleaning up their room.

Most financial experts will agree that by the time a child is ten years old, they should have a modest allowance on a weekly basis for doing chores; whether it be inside chores (involving the household), outside jobs (like mowing the lawn or helping clean out the garage), or sometimes even school-related activities (such as doing their homework or getting specific grades).

Designation

Most parents will designate a child’s income in two ways:

1. Designate which income can or cannot be spent.
2. Designate how much goes into long- or short-term savings.

When deciding which income can or cannot be spent, parents should consider how much actual work went into obtaining the income. A monetary birthday gift, for example, generally requires less work than setting the table or taking out the trash.

The more work, the more spendable the income. This arrangement will set the lesson in the child’s mind that work does equate to income, with the income that cannot be spent going into the savings account.

It is a general rule of thumb that extra work equals extra spending money.  Hence, if the child takes on an extra task for extra income, then that money goes straight to spending with nothing going into savings.

As to how much goes into savings, a flat percentage of 10% to savings and up to 5% to charities may be an acceptable level. One of the fun things parents can do to make giving to charities less painful is to allow the child to save his “charitable” donation until December; at which time the child can partake in various charities looking for toys and other items for children less fortunate.

Many communities, either through banks or religious organizations, have “Angel” trees with the gender and ages of less fortunate children listed. Allowing your child to actually shop for one of these children shows them how their contribution helped another and makes it a personal offering.

Long- and Short-term Savings

To watch a child’s savings grow, there are usually three types of savings methods parents can employ:

1. Long-term savings accounts
2. Short-term savings accounts
3. Small sums tucked away

Long term accounts are generally used for investing in U.S. Savings Bonds, certificates of deposits (CDs) for acquired wealth, or conservative investments in stocks and bonds. These monies are saved for educational expenses such as college, or large-ticket items like a spring-break trip or their first apartment.

Short-term accounts start with a piggy bank and are then transferred to a “kiddie account” offered by most banks. These accounts are for children with the concept being if the bank can get them into saving at a young age, as they mature, so will their banking habits. These accounts can be used for the higher-ticket items the child may want, such as a video game system, a bicycle or a car.

Small sums tucked away is for monies up to $20 that the child has stashed in their room or other safe place that is used for “emergency” or “urgency” spending. It is that rainy day account for when the family plans a quick weekend getaway; the child then has his own money to spend.

The one lesson children need to learn is the cycle of money. You work; you get paid; you spend some; you save some; and the more you save, the more you can have … later.

Giving a child of three years of age, for instance, a $20 weekly allowance and then watching them spend it all on candy or a toy the day they get it, is wasteful at best. Children need to be taught delayed gratification; that spending money can be a good thing, but saving it to spend on something more valuable is even better.

Additional Resources

For more information, visit these Web sites:

• MetLife at http://www.pueblo.gsa.gov/cic_text/money/hlpngyrchild/hlpngyrchild.htm
• Suite 101.com at http://kids-money.suite101.com/article.cfm/teach_children_about_finances
• Child Care Online at http://www.childcare.net/library/money.shtml