Saving supports just about every other financial task and decision your child later learns. How much your child should save isn’t clearcut. To decide what is best for your child, approach saving with a few considerations in mind.
The 10 Percent Rule
The general rule for saving is that a person should put at least 10 percent of their income away. Most financial experts accept this rule of thumb but point out that it is extremely general. For example, if a person starts saving very early, then he has time to build up a bigger pot of money for later and 10 percent might be generous. If a person starts out saving late in life, however, he might need to save more than 10 percent in order to cover expenses. Your child might not be saving for retirement, per se, but he might have other time constraints that affect the 10 percent minimum. If he wants to buy a new video game in a month, for instance, he’ll need to put more of his money toward savings than if he wants to buy the game in a year. This is one reason why goal setting with money is so important for kids.
Inflation and Supply and Demand
Inflation is a small but steady increase in the cost of goods over time. It means that things your child wants or needs will be more expensive in the future. One of the most often cited examples is the cost of college education, which is predicted to exceed $300,000 within the next 20 years. If your child is planning to purchase something a few years down the road, he’ll need to save more than what the item currently costs.
Of course, the basic rules of supply and demand come into play. A good example is technologically-based items, such as televisions or laptops. In this industry, advancements are a nearly everyday affair, with items being virtually obsolete the moment they come onto the market. The price of older models quickly comes down as new models become available and more desirable. If your child wants to save for something that generally decreases in value over time, he might be able to worry less about inflation, assuming he’s fine with not having the latest version of the item.
Uncertainty of Events and Other Income Sources
The fact that even the best laid plans can be thrown off generally means your child should save to accommodate unforeseen events. For example, what if he broke Aunt Jane’s favorite vase and needed to replace it? Would his savings cover the cost of an unexpected college fee? Setting aside a few extra dollars a week might take care of these “rainy day” events and keep your child on a straighter financial path. In the same way, people tend to budget based on their current circumstances. This isn’t necessarily good because circumstances almost always change over time. Your child might have a babysitting job now, for instance, but will he still be able to babysit a few months down the road? A parallel for this for you would be Social Security, the stability of which legislators have debated hotly. Encourage your child to save as though he needs to resort to a “Plan B”, just in case.
One way some parents encourage their children to save is to match whatever funds their child is able to put away. This certainly works for some families, but it also means that your child’s savings grow much more quickly than if he didn’t have you making matching contributions. Your child might not need to save as much to meet a financial goal if you’re helping him out.
Your Child’s Age
In general, the amount of money a child needs increases as they get older. For instance, a 5-year-old kid’s biggest financial responsibility might be her school lunch money, whereas a teen might need to cover the cost of a cell phone, some of their clothes and insurance for a vehicle. Subsequently, it can be a good idea to increase the percentage your child saves as they develop and their responsibilities grow.