Let’s take a look at compound interest as a way to help your child understand why saving is so important. Remember that $4 each day that gets spent on “I wants”? With that $4 of “I want” money, pose this question to your child: At age 12, you decide not to buy soda or snacks. Instead, you save the $4 a day and put it into a savings vehicle, such as a long-term CD that pays 5 percent annual interest, and leave it alone. At age 67 when you are ready to retire, your savings totals: (a) $1,159, (b) $25,355, (c) $80,352 or (d) $427,025. Answer (drum roll please): (d) $427,025. Now here is the truly remarkable part: only $80,352 is from the daily $4 deposits. The remaining $346,673 is interest.
How does that happen? Compound interest. Physicist Albert Einstein called compound interest the most powerful force in the universe. Its called compound interest because it is paid on both the principal and the accumulated interest, so your money grows faster. (A neat compound interest calculator can be found online at http://math.about.com/library/blcompoundinterest.htm.)
Children of all ages need a savings account that pays them interest. Making deposits themselves in their own savings account (and a few withdrawals) will help set the savings behavior for them.
Open the savings account with your child in tow. You will need her birth certificate and Social Security number to open the account. Community banks are good for this kind of account, since they generally offer minor accounts with small minimum deposit requirements.
Once you open the account, talk to your child about a savings goal. This should be a short-term goal something they might want one year from today. The goal should cost less than $100 for the youngest and less than $1,000 for older kids.
Once the account is open and the goal is set, help your child find ways to earn money. Babysitting, shoveling, raking leaves and cleaning the kitchen after dinner all make life easier on us and provide some working capital for kids.
Unfortunately, passbook savings accounts these days carry very small interest rates, which can make it tough for kids to appreciate that miracle of compounding. So consider helping motivate your child by matching her savings.
And, by all means, take your child with you each time you make a deposit. When they are old enough, teach them how to fill out deposit and withdrawal slips. Set a schedule for making deposits, but go at least once a month.