“Save a portion of your money for later,” you beg them, knowing better than they, that later comes sooner than we can ever dream. They look at you with that, “Ah, mom, enough with the save for later thing!”

You take a deep breath and release a heavy sigh, not knowing how to get your children to save money. As parents, we know all too well the ramifications of not saving…we’ve all been in situations where we wished we’d saved a little more or invested a little wiser. We know that our children must learn how to save their money, and a whole lot more, if they are going to ever create the life they want for themselves. One of the most common questions I get from parents who want to teach their kids about money is simply, “How DO I teach my children to save?”

There are some great answers to this question…but let’s look at the basic concept of SAVING first.

Saving Is An Unnatural Act

Saving only happens naturally when you realize there is a profound REASON to save…when you begin to understand the idea of anticipation, which is the expectation of something happening in the future. For children, they have difficulty with this concept…they are brilliant ‘in the moment’ and not very good at ‘in a minute.’

The other thing about saving is that we’re hard-wired NOT to save. We’re actually hard-wired for instant gratification and if you look back at when we were cavemen and cavewomen, it makes a lot of sense.

Imagine, there you are, spear in hand. You’ve gone out with ‘the guys’ to kill a buffalo. Just then, a big one walks by…you whisper to your hunting partner, “let’s wait for the next one.” He looks at you and says, “What are you, nuts? What next one?”

You see, back then, we needed to get the deer and pick the berries right then and there because our survival depended on it. And our brains evolved in such a way as to provide us with powerful chemicals that lead to positive, happy feelings when we ‘get it now’ instead of waiting until later.

For a great read on this subject, do a search for Time Magazine’s article, “Why Johnny can’t save for retirement.” You’ll begin to understand why marketing most products and services to us human beings is so easy.

Why Save Anyway?

It’s been well established that in order to teach people anything, they must believe the information is relevant to them somehow. Saving is one of those topics.

In order to get children to listen when it comes time to teach them to save, it’s important that they understand why it’s relevant to them. Let me tell you a little story…

Years ago there was a young man, about 15 years old. His name was Larry. Larry, being the bright, resourceful young man that he was, got himself a little job during the summer between 10th and 11th grades. He was so proud of himself…he got his first paycheck of $100 and showed it to his mom. He told her about all of the stuff he was excited to go buy with his first paycheck.

His mother, doing the best that she could, instructed, “Now Larry…you need to save some of your money for later when you’re older and want to retire. Every time you get a paycheck, just put $50 away. That’s all you need to do.”

Larry was old enough to understand the idea of retirement ~ after all, his grandparents were all retired, living what he had been told was “the good life.” Larry did some quick math in his head…

OK, $50 times twelve months is $600. $600 times ten years is $6000. Hum, times twenty years is $12,000. That’s not much money, he thought to himself. He decided, based on those quick calculations, to wait until he was making ‘real’ money to save for retirement. And off he went to spend his hard earned cash.

What Larry’s mother neglected to show him was how compound growth (not just compound interest) causes the value of money to grow exponentially over time, especially when you begin investing early. Larry might have been more interested if she’d shown him how $3000 a year invested for eight years from age 19 to 26 could grow to close to a million dollars (invested at 10%) by the time he was 60!

What Larry’s mother left out was the WHY! And kids, just like adults, need to see and understand the WHY behind what we ask them to do, or, as you already know, they will rarely do it…unless you make them. Wouldn’t it be sweeter to inspire them to save on their own because they understand the WHY behind it? Absolutely.

Understanding There IS A Later

So how do we teach children there is a “later” to save for? One way is to sit down and help them develop a life timeline and talk about how much money they might need during each stage.

Start by drawing a line on paper ~ put the word ‘birth’ on the left and ‘death’ on the right. Put 50 years old in the middle.

Birth — high school — college — get married — have kids —— work —————  retire ——- Death

0                                                                                    age 50                                                                        ?

Then talk about the different phases they might go through during life…start with high school, the possibility of college, the working years, marriage, child-rearing, empty-nesting, retirement. Explain that this is just one idea of what life might look like for them and that their life will develop based on their choices and decisions they make as they go through life.

Ask them how old they’d like to be when they stop working for a living. Put this age on the time line as well and then figure backwards to start introducing the WHY of saving and investing to them. (This is a great exercise for you, as well.

Let’s say your son or daughter is ten years old. Let’s say they want to retire or be financially free by age 45. This means they have 35 years to prepare for retirement. Remember, this is THEIR timeline so if they want to stop working when they’re 45, it’s perfectly OK. Just figure the numbers so they can see how much money it will actually take for them to be financially free at 45.

Now ask them to figure out how much money it’s going to take to live the way they want to live when they’re 45 years old. Again, a great exercise for you to do at the same time. Let’s say they come up with a lifestyle that requires $5000 a month. Next, based on the standard model of financial planning, you need to help them figure out how much money they must have invested with a 6% return in order to receive that $5000 a month.

Though they may be too young to understand, this is a great time to introduce inflation and taxes. You don’t necessarily need to work these two figures into the equation but just mention that over time the price of things goes up and that they’ll probably have to pay taxes on the money they make each month before they end up with $5000. Bottom line…the five grand is their monthly net income.

OK, here’s the simple calculation for this scenario. They will need at least $1,000,000 invested with a steady rate of return of 6% (interest rate or growth rate) to yield approximately $5000 per month to live on.

Now comes the fun part. Take the $1,000,000 and divide it by the 35 years they have until they want to retire. You get roughly $29,000! Ask them if they think they can save $29,000 each year for 35 years (remember, they’re 10!).

You probably have their attention now.

Explain The Why

What’s next? This is the WHY you’ve been waiting for them to ask about. WHY they should start saving and investing early? This is when you bring out compound interest charts and explore how money grows over time and that the earlier they start, the better.

I’ve attached three pages from our Financial Freedom Playbook that you can download and chat with your kids about. Oh, and there are tons of investment calculators on the web where you and your children can explore how different amounts of money invested at different rates of return for different lengths of time multiplies.

Click here to download the Magic of Compound Interest worksheet. (The answers are $756,000 for 10% and 1,700,000 for 12%, respectfully.)

Click here to download a Compound Interest Table to play with different lengths of time and rates of return.

Click here to download the Test of Time to see the real power of saving early.

Show Children The Unpleasant Alternatives To Being Financially Free

 

I’ve heard it said that people change for one of two reasons; to move AWAY from pain or move TOWARDS pleasure. Studies show that people are far more motivated to move AWAY from pain.

One of the things that many parents do (that isn’t always the wisest in the long run), is protect their children from the real world…the world where people are sick, dying, living in terrible conditions, don’t have enough to eat.

It’s a good idea to expose your children, in safe doses, to things that most of us would label as undesirable for ourselves and the ones we love. These types of experiences can have a profound effect on what a child chooses for him or herself and can help influence a child’s choices later.

Similar to the effect that taking a might-be juvenile delinquent into a jail cell (or, better yet, letting him sleep in one over night) might have on him, so might taking your children into a very poor, run down part of town have an impact on their financial choices and habits.

When my son was 12-years-old, I had the opportunity to take him through Tijuana, Mexico with two big strong men as our escorts. We drove for quite a long time with him looking out the window in disbelief, his soul not understanding what his eyes were showing him.

We talked later about this trip on many occasions and I believe to this day that it was a good experience for him as he had grown up under the wings of safety and good times in a little Oregon town until that moment. Sometimes seeing the REAL thing makes it more believable than when you see it on TV.

Expose Them To People Who Made, And Didn’t Make, Wise Financial Choices

We all know retired people who live well, having saved and invested for this time in their lives and are grateful to have the freedom to enjoy retirement the way they wish.

We also know a whole lot more who didn’t save and invest wisely and are now paying the price, still working part or full-time and continually feeling exhausted and financially stressed.

Find willing souls in both camps and ask these people to spend time with your children, and do this in the context of learning from others who have been there. You might be surprised at what motivates your son or daughter to make certain types of financial decisions later on. Some of my most memorable moments as a child were when I had the opportunity to ask my parents’ friends questions about their own lives.

Provide Saving And Investing Systems And Strategies For Them

Once you have your child’s attention and he begins to see the WHY behind saving and investing for his future, you’ll need to help guide him, giving him systems and strategies to use to be financially successful as an adult.

Many of you know The Money Jar system that we teach in our programs. It’s a way to allocate the money that comes into and goes out of our lives. It involves recognizing the many jobs that money actually has in our lives.

The Jar System is a great place for anyone to start wanting to develop great money habits. Click here to download our ebook, The Money Jars: Your Magical Money Management System.

Pay Them To Learn About Money

First, if you haven’t purchased The Ultimate Allowance book yet, please do yourself a favor and order your copy now. There’s a wealth of information in this book that will help you financially educate your child like a pro. The book shows you how to use the money you already spend ON your child to give them the practice they need to develop financial skills that will empower them forever.

Second, I actually do mean pay them to learn about money. Check out the list of financial books at www.innerwealthpublishing.com/booksgame.php. Order a few of them from Amazon and pay your son or daughter $10-$25 to read each one. Before you pay them, have them give you a book report and have a conversation with you about how they will use the information in each book.

I promise this may be the very best investment you ever make in your child’s education! After all, you do want them to move out and STAY out, right?

The Ball Is Now In Your Court

So, in summary, yes, teaching and inspiring our children to save and invest their money for a future they can’t even imagine yet, can be tricky and can take some parental creativity. But with a little planning on your part, and reading on their part, you might find that the process really isn’t as daunting as you think.

Feel free to give us a call or shoot us an email with questions. And please leave your comments here on the blog for others to read, enjoy and learn from as well.

And as always…this is just something else to think about…