Many parents are good with teaching children how to save to buy something they want, such as a new bicycle or video game. But how many parents teach kids to save for the very long term?
Like all good habits, good financial habits should be developed from an early age to ensure success. Here are a few things to bear in mind when teaching children about saving money.
Saving to spend
In today’s high debt environment, saving to spend is a lesson most people could learn. It’s also an important one for children, as it can help them learn planning skills, even if they just receive an allowance. If they have a job, saving to spend is a great way to work towards a goal, as well as learn the pride of earning their own money and buying something all their own.
Care must be taken, however, to ensure children don’t get the impression that people only save money to buy things later. How many adults can admit they do this too? Introducing an aspect of saving to save can help put spending, and saving to spend, into perspective.
Saving to save
One of the most significant financial lessons anyone can learn is to save for the sake of saving. It’s not the easiest or most fun thing to do, but it’s vital for financial success.
What this means at its core is to consistently put money aside for one’s retirement. Not to buy a first home, or pay for a wedding or take a vacation, but for the time in one’s life when they are no longer earning income. The concept is simple: while one is working, they should tuck away a little for when they transition out of the work force.
Defined-benefit pension plans used to do this for people. Money disappeared off people’s paychecks, and it went relatively unnoticed. Nowadays pension plans are leaner, or completely absent. This makes long-term savings even more imperative.
How to do it
The easiest way to build up a nest egg is to observe the basic principal touted in popular books like “The Wealthy Barber” and “The Richest Man in Babylon”. There are two steps: Save 10 per cent of every paycheck for retirement. The funds can be used to make RRSP or TFSA contributions.
The second step is perhaps even more important: plan life around the money that remains. That means avoiding overspending and consumer debt. As the old saying goes, it’s not how much money you make, but how much you keep. It doesn’t matter if a person makes a million dollars a year if they chronically spend two million.
Aside from the benefit of making responsible choices, parents can expect that if their children save 10 per cent of their income, it is overwhelmingly likely that they will be able to retire at a comfortable age.
This concept is not just for those who attend university. For example, a person who enters the work force at age 20 earning $50,000 annually, or $39,000 after deductions, could retire at age 57 and with the same income as when they were working, until age 85. Along with the Canada Pension Plan and Old Age Security, as well as a historically feasible 6 per cent annual rate of return, this is possible with saving only 10 per cent of one’s income.
Many parents worry about how responsible their children will grow up to be, with money and in other aspects of life. Raising a spendthrift isn’t ideal, but neither is raising a miser. The best answer lies in the middle. After all, isn’t moderation the key to success in most aspects of life?
Children who learn and apply good financial habits from an early age will likely have more freedom, time and energy as adults to live their best lives. Isn’t that what all parents want?