Kids Savings Accounts | Why Smart Parents Set Them Up
American Kids Who Lack Basic Financial Education Fall Behind
Why we choose not to require our children to master the basics of managing their personal finances is beyond me, but that doesn’t mean we can’t teach our children what they need to know to function financially in our society. There is no reason it can’t start early with kids savings accounts, play time with games like Monopoly and Payday, and one on one conversations where children’s demands are turned into simple learning exercises.
Making Learning about Savings Accounts Fun
One of my favorite learning exercises takes the kids savings accounts and makes the interest earnings more tangible by converting them into gumdrops (or whatever your child’s favorite candy is). It doesn’t take a lot of fancy math to make this exercise work for you, and doing so will make your kids savings accounts much more real to them. Using something tangible like gumdrops will make visiting the website of your child’s online savings account an important learning opportunity on the less tangible subjects of choice, sharing, opportunity and other economic topics. The beauty of these exercises is that those awful words like economics and finance never come up. Instead the conversation remains simplified into easy to understand and hold things like dimes and gumdrops.
Here’s How It Works:
For this exercise you need a Dime and a Gumdrop, and the name of your child’s best friend or playmate (or use yourself in the example)
Step 1: Determine A Basic Amount of Earnings on Savings
In its most basic form interest income is a simple computation. Most savings accounts pay their interest monthly. Let’s pretend your account offers 1.2% APR. How much do I earn if I have $100 in my child’s account?
The computation looks something like this:
$100 x (1 + 1.2%/12) = $100 x (1.001) = $0.10
A dime doesn’t sound like much, but your child will know a dime when they hold it in their hand. You can tell your child their account earns one dime each month, and that they can do whatever they like with that dime – perhaps they could buy a piece of their favorite candy – like a gumdrop perhaps.
What If You Have a Friend Over and Want to Give Her a Gumdrop too?
At this point you ought to have your child’s attention and can really make the lesson stick if you hold their attention a little longer. Ask them to pretend their best friend (I’ll use Jane for simplicity) is over visiting and it would be nice to be able to give Jane a gum drop too. What would we need in order to buy two gumdrops? With a little prodding your child should be able to come up with the correct answer, “two dimes.” At this point your kid is hooked and ready for the close of the lesson. So you ask your child this question: “How can we get two dimes?”
Unless your child is a young Einstein they’re not going to come up with the answer, but if they’re following you they may say, “From my savings account?” Now you can teach them the choices they have as to HOW they can earn the needed two dimes.
Open a Savings Account
The choices are:
- There needs to be $200 in the account, (double the amount of the balance of the account, i.e. 200 x 1.2%/12 = $0.20) OR
- The interest rate needs to be 2.4% (double the original rate i.e. $100 x 2.4%/12 = $0.20), OR
- Your child needs to go without a gumdrop for one month to have two dimes earned in the account (double the waiting period)
