A New Year and New Opportunities to Teach Kids About Finances
Kids aren’t getting the financial education they need: Only 20 states require high school students to take an economics course.
Right now at the beginning of a new year is a great time to share your financial knowledge and help your kids put it into practice. Imagine what can happen if your kids learn good savings habits when they’re still kids. When they hit their 20s and get their first “real” job, they can start right away to set aside a bit of their paycheck each month. Their money will have literally decades to grow.
In this hypothetical scenario, check out what happens with Susan and Tom.
Susan started saving when she was 25. Over the next 10 years, she put away $3,000 a year for a total of $30,000 in an account with an 8% rate of return. At this point, Susan stopped contributing but let it keep growing for the following 20 years.
Tom started saving 10 years later at age 35. He also put away $3,000 a year into an account with an 8% rate of return, but he contributed for 20 years (for a total of $60,000).
Even though Tom put away twice as much as Sarah, he wasn’t able to enjoy the same account growth:
Sarah would achieve account growth to $218,769.
Tom’s account growth would only be to $148,269 at the same rate of return.
Why did Susan end up with more in the long run? Even though she set aside less than Tom did, Susan’s money had more time to compound than Tom’s, which, as you can see, really added up over the additional time. (Keep in mind: All figures are for illustrative purposes only and do not reflect an actual investment in any product. Additionally, they do not reflect the performance risks, taxes, expenses, or charges associated with any actual investment, which would lower performance. This illustration is not an indication or guarantee of future performance. Contributions are made at the end of the period. Total accumulation figures are rounded to the nearest dollar.)
Susan’s 10-year head start made a huge difference for her.
So back to you and your kids. Chances are the majority of your children’s financial education will happen at home. Feel free to use the above illustration to explain the importance of early retirement saving to your 8-year-old, but be warned – you might get a blank stare or a full-on fidget fest. Luckily for everybody involved, there’s a simple exercise you can do with your kids today to give them a head’s up about what it might be like to set aside some of their paycheck when the time comes.
For the really young ones, each time they receive money (earned, received as a gift, etc.), help them save part of it. It really is that simple. No complicated formulas or examples. After all, the basis of saving for retirement is…saving money. If your kids are a little older and ready for the next step, help them save with a specific goal in mind, like 1 big toy or activity at the end of the month.
Working on exercises like this with your kids has the potential to make a huge difference for them when they start preparing for retirement. It may seem small, but you’re laying the groundwork for solid financial literacy, one saved dollar at a time.
Source: Council for Economic Education: “Survey of the States.” 2016