From Piggy Banks to Roth IRAs – A Phased Approach to Saving

Perhaps now more than ever it’s important to talk about smart money moves with your children. We’re all feeling the impact of the rising cost of goods and services – otherwise known as inflation. As families look to tighten the belt on their budgets, it’s a great opportunity to use this as a teaching moment. After all, teaching our children about personal finances is critical to their future success.

Whether your kids are just starting out, about to leave the nest, or anywhere in between, it’s important to teach the value of saving money. A best practice is to connect saving with a goal, so they have some motivation and skin in the game. When setting goals, teach them how to make SMART goals — that is, Specific, Measurable, Attainable, Realistic and Time-bound. Whether your child is saving to buy a toy, clothes, their first car, or college the process of teaching kids how to save is the same.

Once a goal is set, let’s break down a phased approach to saving.

  1. If your child is pre-school age, perhaps they are saving up for a special toy. Using a piggy bank is one way to show them how money can build up over time. Saving any birthday money or allowance will teach them about delayed gratification and provide a sense of achievement.
  2. For elementary school age children, ages 6-9 and 10-12, a youth savings account is an available tool to help them reach their goals. Earned interest is low in these accounts, but funds are accessible at any time without penalties. Perhaps they are saving for a bike for the summer, so easy access will be important. At this age, your child may be earning allowance doing more chores around the house or starting to branch out into the neighborhood with lawn care, baby or pet sitting. They don’t have to save everything they make but encourage and teach them about the value of money as they make deposits and withdrawals. With your help, they can save a little toward their goal and review their monthly statement, check their balance, and see their progress.
  3. Certificates of Deposit (CDs) and savings bonds are tools to consider for intermediate-term goals such as saving for college or buying a car. They are stable and low-risk investments that earn more than a savings account. The downside is that money invested is not accessible without penalty for the length of the term. For example, if your child wants to purchase a new computer in three years, purchasing a CD for that length of time will earn more interest than leaving the money in their savings account and he or she will have more saved to pay for the computer. Here are a few specifics:
    • Certificate of Deposit (CD) – Available through banks and credit unions, money is deposited for a period (months to years) and earns a defined rate of interest if held for the entire term
    • Savings Bonds – Issued by the U.S. Treasury and available for purchase at TreasuryDirect.gov. Two common types are:
      • Series EE – earn a fixed rate of interest
      • Series I – earn a variable rate of interest based on inflation
  1. Teenagers 13-15 and 16 and up may have their sights set on multiple goals with various timelines. Savings goals could include new clothes, a computer, or a car. At this age they also have more opportunities for employment. Any savings tool may be useful for this age group, but as soon as they have earned income, another savings investment tool to consider is a Roth IRA. This is an individual retirement account with tax-advantaged features to promote saving for retirement. Contributions are made from after-tax earnings. Since most kids do not earn enough to pay income taxes, their early contributions and related distributions could be tax-free. With a wide spectrum of investment options available, they may earn a higher rate of return. Contributions may be withdrawn penalty-free after 5 years and earnings are tax-free and penalty-free after age 59 ½. With time on their side, young adults can use the power of compounding to build money for their future. However, it is critical to remember that penalties may apply for early withdrawal of funds. Also keep in mind that with the potential for a higher return (compared to the previous tools above), comes greater risk. Check out this article at CFPB.gov which answers the question of whether your son or daughter can open an IRA with their first part-time job.

As parents we know the cost of goods and even simple activities like going to the movies gets more expensive with time. Teach your child the importance of saving early and often. Be sure to do your research to learn which savings tool is best given market conditions (i.e., high or low interest rates, inflation rates, etc.).

MilKids has resources, activities and tips to help you teach your kids the basics of money management no matter your child’s age. Teach your kids to set goals, start a saving habit to meet their goals, and use appropriate tools to manage money effectively through every stage of life. Start today to lead your children to a stronger financial future.

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Perhaps now more than ever it’s important to talk about smart money moves with your children. We’re all feeling the impact of the rising cost of goods and services – otherwise known as inflation. As families look to tighten the belt on their budgets, it’s a great opportunity to use this as a teaching moment. After all, teaching our children about personal finances is critical to their future success.

Whether your kids are just starting out, about to leave the nest, or anywhere in between, it’s important to teach the value of saving money. A best practice is to connect saving with a goal, so they have some motivation and skin in the game. When setting goals, teach them how to make SMART goals — that is, Specific, Measurable, Attainable, Realistic and Time-bound. Whether your child is saving to buy a toy, clothes, their first car, or college the process of teaching kids how to save is the same.

Once a goal is set, let’s break down a phased approach to saving.

  1. If your child is pre-school age, perhaps they are saving up for a special toy. Using a piggy bank is one way to show them how money can build up over time. Saving any birthday money or allowance will teach them about delayed gratification and provide a sense of achievement.
  2. For elementary school age children, ages 6-9 and 10-12, a youth savings account is an available tool to help them reach their goals. Earned interest is low in these accounts, but funds are accessible at any time without penalties. Perhaps they are saving for a bike for the summer, so easy access will be important. At this age, your child may be earning allowance doing more chores around the house or starting to branch out into the neighborhood with lawn care, baby or pet sitting. They don’t have to save everything they make but encourage and teach them about the value of money as they make deposits and withdrawals. With your help, they can save a little toward their goal and review their monthly statement, check their balance, and see their progress.
  3. Certificates of Deposit (CDs) and savings bonds are tools to consider for intermediate-term goals such as saving for college or buying a car. They are stable and low-risk investments that earn more than a savings account. The downside is that money invested is not accessible without penalty for the length of the term. For example, if your child wants to purchase a new computer in three years, purchasing a CD for that length of time will earn more interest than leaving the money in their savings account and he or she will have more saved to pay for the computer. Here are a few specifics:
    • Certificate of Deposit (CD) – Available through banks and credit unions, money is deposited for a period (months to years) and earns a defined rate of interest if held for the entire term
    • Savings Bonds – Issued by the U.S. Treasury and available for purchase at TreasuryDirect.gov. Two common types are:
      • Series EE – earn a fixed rate of interest
      • Series I – earn a variable rate of interest based on inflation
  1. Teenagers 13-15 and 16 and up may have their sights set on multiple goals with various timelines. Savings goals could include new clothes, a computer, or a car. At this age they also have more opportunities for employment. Any savings tool may be useful for this age group, but as soon as they have earned income, another savings investment tool to consider is a Roth IRA. This is an individual retirement account with tax-advantaged features to promote saving for retirement. Contributions are made from after-tax earnings. Since most kids do not earn enough to pay income taxes, their early contributions and related distributions could be tax-free. With a wide spectrum of investment options available, they may earn a higher rate of return. Contributions may be withdrawn penalty-free after 5 years and earnings are tax-free and penalty-free after age 59 ½. With time on their side, young adults can use the power of compounding to build money for their future. However, it is critical to remember that penalties may apply for early withdrawal of funds. Also keep in mind that with the potential for a higher return (compared to the previous tools above), comes greater risk. Check out this article at CFPB.gov which answers the question of whether your son or daughter can open an IRA with their first part-time job.

As parents we know the cost of goods and even simple activities like going to the movies gets more expensive with time. Teach your child the importance of saving early and often. Be sure to do your research to learn which savings tool is best given market conditions (i.e., high or low interest rates, inflation rates, etc.).

MilKids has resources, activities and tips to help you teach your kids the basics of money management no matter your child’s age. Teach your kids to set goals, start a saving habit to meet their goals, and use appropriate tools to manage money effectively through every stage of life. Start today to lead your children to a stronger financial future.

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We are team of financial professionals who understand military life because we have experienced military life. Our goal is to educate and empower military spouses to help them make smart money moves. We combine passion and expertise to ensure you get the most accurate and relevant information. Take comfort knowing Certified Financial Planner™ professionals, an Accredited Financial Counselor® and the Department of Defense Office of Financial Readiness have vetted the content on this site.
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