Understanding why you need to save money is a crucial life skill, but it’s not one that always comes easy. According to UK personal savings statistics, 9% of Brits have no savings, and 41% have savings that would only last a month without an income. These are just some reasons why teaching kids how to save from a young age is vital to their long term security. Here's what you need to know.
What are savings?
Savings are money or income not spent and put into accounts to accumulate. Explaining this concept to kids is tricky, especially if they can’t see money growing week by week. What will help is to explain savings with a real-world example. For younger kids, show them what would happen if they saved two sweets a day in a jar for a week. The next step is to explain that they can also save their money. Ask them to put any spare change they have (or you have) in a pot each day. At the end of the week, show them how much they have ‘saved’.
With older kids, transition to saving goals for something they want and show them how long it will take them to reach this by putting away half their pocket money each week. To motivate them, suggest they add in birthday money or earn extra money to boost their savings and each week show them their progress.
Why is saving important?
Our recent economic research with CBI Economics has shown the difference teaching kids to be financially literate can make. The research has found financial literacy raises early-career earnings prospects by up to 28% Teaching kids how to save also gives them economic confidence around spending, enabling strong decision-making for long-term investment and less debt overall.
“I've learned that saving up and thinking ahead for my future is really what I should be doing. I've learned a lot of big money lessons like budgeting and just general saving. It [savings] can snowball, you can start a savings account with £10 and it will eventually turn into £600 if you keep saving up.”
What are the advantages and disadvantages of saving money?
The big advantage of savings is having money in your account in case of an emergency and the potential to earn interest on the money saved.
The main disadvantage of savings is having less money to spend in the moment and potentially lower interest rates than other types of accounts/investments. Plus, bear in mind with investments, your savings can go up and down.
Types of savings and investment accounts
There are lots of different types of accounts you can save money in, and they are:
Current account - an everyday account with no interest for savings. Your child can use it to manage their everyday transactions. Current accounts do not usually generate interest, but they do allow you to instantly access your money.
Instant access savings - savings accounts where you can withdraw whenever you want tends to have a low-interest rate.
ISA - a tax-free individual savings account. The maximum you can save a year is £20,000. Though you need to be 18 for an ISA.
Junior ISA - this is a long-term, tax-efficient investment account. Only a parent or guardian with parental responsibility can open a Junior ISA for a child, but anyone can pay into it. You can pay up to £9,000 each tax year, and the money is locked away until your child turns 18.
Fixed-rate savings accounts usually have a notice period to withdraw money or a fixed term where you can’t withdraw money. For this, you get a higher interest rate.
Premium Bonds - these are investment products issued by National Savings and Investment (NS&I). Unlike other investments, where you earn interest, you are entered into a monthly prize draw where you can win between £25 and £1 million tax-free.
Automatic savings apps use clever tech to work out what you can afford to save and then do it for you, automatically – moving money from your bank account to a virtual savings account. The idea is that you start building up savings without really noticing the cash is going.
Child Trust Fund (CTF) - This is an older type of savings account for children, which is very similar to a Junior ISA. A CTF is also a long-term and tax-free savings option. However, CTFs can no longer be opened. If you want a new CTF for your child, you should look at Junior ISAs instead.
What’s the difference between saving and investing?
Saving is putting money aside, bit by bit, usually with an end goal. Perhaps a holiday, car or deposit for a house or emergencies. Savings are generally put into a bank or building society savings account.
Investing is taking some of your money and trying to make it grow by buying products that might increase in value over time. For example, you might invest in stocks and shares ISA over a cash ISA, or you might invest in property or shares in a fund. The gains can be more significant when you invest, but so will the risk of losses, which means your money can go up or down.
How much money should you save?
While there’s no one-size-fits-all rule about saving, experts suggest the 50/30/20 rule. A strategy means spending 50% of net income on essentials, 30% on non-essentials, and 20% into savings.
With kids, encouraging them to save smaller amounts regularly gets them into the savings habit without overcommitting too much money. As for what age you should start kids saving by, it’s never too early.
A study published by the Money Advice Service highlights the power parents possess to shape the money habits of their children. The study found that by age seven, most children are capable of complex functions such as planning and delaying a decision until later. This means between 6 and 7 years is the perfect age for pocket money, chatting about spending and establishing good money habits – all things which a GoHenry kids debit card can help with.
Related: How much should your child save?
Help your child set savings goals with GoHenry
The GoHenry card not only allows your child to participate in the digital economy but also enables them to set savings goals within their app. This is perfect if they’re saving for a new video game, a pair of trainers or a special occasion like a holiday, day out or Christmas.
“I wish my adult account had the goals option. My son loves it and really enjoys reaching a goal, considering if he still wants the item he was saving for and if he does get it. I also like that he has a savings goal for holidays. I added some extra to his pocket money and added my holiday savings so it is our goal. Love it.”
Helen, mum (Trustpilot)
To further the conversation around money, investing, savings and more, your child can also use Money Missions on the GoHenry app. Here your kids can watch animated videos, take quizzes and earn points and badges to further their financial education.