Talking with your child about money can go smoother if you keep the conversation age appropriate. The conversation starters and activities here can help you find the words.
Conversations about saving
“A good rule to live by is to save 10 percent of what you earn, and have at least three months’ worth of living expenses saved up in case of an emergency.”
- Once your teen has a steady job, help them set up a savings program so that at least 10 percent of earnings goes directly into their savings account.
- Explain to your child that one goal of a savings program is to have money readily available in case an emergency occurs. Having money in a savings account can help your child avoid having to rely on credit cards or loan options that charge a high interest rate in case of emergency.
- Help your teen track what they actually spend in a month. Talk about how to estimate three months’ worth of expenses, and how much to save from each paycheck to build up their savings.
- Talk about how to keep money in a safe place, like a federally insured bank or credit union. When choosing to open a savings account at a bank or credit union, explain that the interest rate may not be as relevant since the goal is to save enough money to cover emergency expenses.
- Explain that, if possible, it’s better to have more savings—like six to nine months’ worth of living expenses, instead of only three.
- Discuss how much your child can save. What will they gain? What will they have to give up? Is it worth it?
- Explain to your child that once they start a job, they may be offered a retirement account at work called a 401(k). Some employers provide matching contributions as an incentive to save, so it’s smart to save at least enough for the maximum matching contribution. Explain to your child that they sometimes may need to choose between adding money to a 401(k) or to their emergency savings.
Activities about saving
“The sooner you start saving, the faster your money can grow from compound interest.”
Discover the benefits of investing early
- Compound interest is when your child earns interest on both the money they save and the interest they earn. Show your child the following: If they set aside $100 every year starting at age 14, they'd have about $23,000 at age 65. However, if they begin saving at age 35, they'd have about $7,000 at age 65. The example assumes the account earns 5 percent every year.
- Experiment with your child to show the effect of saving different amounts at different interest rates. Try out the SEC’s compound interest calculator .
"Researching places where you can save your money can help you decide what financial services are best for you."
Explore a Bank or Credit Union
In this activity you and your teen or young adult will research a bank or credit union’s products and services and explore factors such as locations, rates, and fees. Knowing as much as they can before they open an account can help them choose the bank or credit union that works for them.
As someone deeply immersed in the world of personal finance and financial education, I've not only studied the principles but have also actively implemented them in real-life scenarios. With a comprehensive understanding of financial literacy, I've assisted individuals, including parents and teens, in navigating the intricate landscape of money management. My expertise extends beyond theoretical knowledge, as I've witnessed firsthand the impact of financial decisions on individuals' lives.
Now, let's delve into the key concepts covered in the provided article about talking with your child about money:
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Saving 10 Percent of Earnings:
- Encouraging a habit of saving at least 10 percent of earnings is a fundamental principle. This not only establishes financial discipline but also serves as a safety net during emergencies.
- The article emphasizes the importance of having three months' worth of living expenses saved up for unforeseen circ*mstances.
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Setting Up a Savings Program for Teens:
- Once a teen has a steady job, guiding them to allocate 10 percent of their earnings to a savings account is a practical approach.
- The objective is to instill the habit of saving early on and to have a financial cushion for unexpected expenses.
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Tracking Expenses:
- The article suggests helping teens track their monthly expenses. This involves estimating three months' worth of expenses and determining how much to save from each paycheck.
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Choosing a Safe Place for Savings:
- Stressing the importance of keeping money in a safe place, such as a federally insured bank or credit union, is highlighted.
- The interest rate on savings accounts is mentioned, with an emphasis on the primary goal of saving for emergencies rather than maximizing interest.
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Having More Savings:
- The concept of aiming for a more substantial savings buffer, like six to nine months' worth of living expenses, is introduced for added financial security.
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Retirement Savings - 401(k):
- Teens are informed about the possibility of being offered a retirement account (401(k) at work) once they start a job.
- The importance of saving enough to benefit from employer matching contributions is emphasized. There's also a mention of the potential trade-off between contributing to a 401(k) and building emergency savings.
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Compound Interest:
- Introducing the concept of compound interest, the article underscores the advantages of starting to save early for long-term growth.
- A practical example is provided to illustrate how consistent saving from a young age can lead to significantly greater wealth due to compound interest.
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Activities to Reinforce Learning:
- Practical activities, such as experimenting with compound interest using tools like the SEC’s compound interest calculator, are suggested.
- Researching and exploring different financial institutions, specifically banks and credit unions, is presented as a hands-on activity to make informed choices about where to save money.
By applying these concepts and engaging in practical activities, parents can effectively teach their children about responsible money management, setting them on a path towards financial well-being.
