The ABCs of Money: Teaching Your Kids to Pay Themselves First

Use Goals to Inspire Your Child

By Susan Beacham

To teach our children about how to save money, we need to demonstrate that behavior and save money. As a nation, our track record on that score is not good. In fact, reports on adult savings behavior are downright scary.

In a recent study by the Consumer Federation of America and the Financial Planning Association, one-fifth of Americans said they think winning the lottery represents the most practical way to accumulate several hundred thousand dollars. According to the U.S. Department of Commerce, the savings rate for 2005 was the lowest since the Great Depression, negative 0.5 percent. That means that last year, many people spent more money than they brought home in their paychecks.

A Simple Fix

This kind of behavior is resulting in generations of kids that fail in adult life, not because they are not smart enough to get a great job, but because they don't know how to be smart about the money they earn from their work. We as their parents can fix that. And it's simple.

Every time you get paid, let your kids know that you are taking a portion of that paycheck and putting it into a savings account. Some of that savings may get invested later, but, for now, let your children know that after you get paid by your employer, you pay yourself before spending any money.

Lots of kids will glaze over during this discussion. Grab their attention back with this exercise: Agree to record for one week what you (and your child if he's old enough to spend money without you) spend on a daily basis. At the end of each day, talk about what portion of the money was spent on "I want" vs. "I need" items. "I wants" are things such as snack food or a small toy for the kids, or coffee out or a snack on the run for parents.

Chances are you will be able to identify $4 each day that was spent on the "I wants."

The Miracle of Compounding

With that $4 of "I want" money, pose this question to your child: At age 12, you decide not to buy soda or snacks. Instead, you save the $4 a day and put it into a savings vehicle, such as a long-term CD that pays 5 percent annual interest, and leave it alone. At age 67, your savings totals how much?

(a) $1,159

(b) $25,355

(c) $80,352

(d) $427,025

Answer (drum roll please): (d) $427,025. The truly remarkable part is that only $80,352 is from the daily $4 deposits. The remaining $346,673 is interest!