Understanding why you need to save money is a crucial life skill, but it’s not one that always comes easy. According to financial studies, 29% of people in the US have no savings accounts, and 51% have $5000 or less in savings. 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.
Related: Guide to financial literacy for kids
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 allowance 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?
Research has shown the difference teaching kids to be financially literate can make. Kids who received financial education from an early age were 21% less likely to have credit card debt in college, which is a direct positive of having knowledge on savings and budgeting. 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, as well as 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.
Types of savings accounts
There are lots of different types of accounts you can save money in. Most of these are for adults, and you will have to help your child open accounts. However, it's still important to teach your child about different saving options for when they are an adult:
- Checking account - an everyday account with no interest for savings. Your child can use it to manage their everyday transactions. Checking accounts do not usually generate interest, but they do allow you to instantly access your money.
- Kids savings account - These are for children under 18. They usually do not have monthly account fees and they often have mobile apps to make them easier for kids to use.
- Regular savings account - Accounts where you can quickly and easily access your savings, but you usually get a smaller interest rate compared to other accounts. Some traditional savings accounts allow you to only make up to 6 monthly withdrawals.
- High-yield savings accounts - These have higher interest rates but usually mean that you cannot access the money through an ATM, and transfers out of the account can take longer.
- Money market accounts - These are easy to access, like checking accounts, but you usually have to have a minimum balance, which is usually $1000. If the balance goes below this, there is a fine.
- Certification of Deposit accounts - These accounts have higher interest rates, but your money is locked away for longer. Accessing your money early can incur a fee.
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 saving for emergencies. Savings are generally put into a bank 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 on the stock exchange, or you might invest in property or shares in a fund. The gains will be much 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. This 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 the age of 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 allowance, chatting about spending and establishing good money habits – all things which a GoHenry kids debit card can help with.
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 allowance and added my holiday savings so it is our goal. Love it.”
Helen, mom (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.
Get started with the GoHenry kids debit card today and help teach your children about finances and savings.