Encouraging children to save their money serves as a foundation for a more successful financial life in adulthood. However, decreasing savings rates make the effort less appealing. In a day when some savings accounts pay just 0.1 percent a year, what is the right move?
Before you decide what is best for your children, here are some points to help drive the decision-making process.
Building Good Habits Takes Time
The biggest reason to encourage children to put money into savings is it helps them build good habits. It can take time to change how you manage money once you get used to a particular way of living. By starting young, the process of saving feels more natural. It becomes integrated into their personal paradigm and makes the effort more likely to stick when they head out on their own.
Previously, higher savings rates allowed children to experience the wonders of compound interest first hand. It was easy to see how keeping the money in the account had benefits. And this provided a valuable lesson to the younger ones among us.
Savings Rates Beating Inflation
Some of the best savings rates still reach 3 percent. This means the interest rate beats the current rate of inflation. Money put into a child’s account will grow at a rate that increases their overall buying power of their pounds over time. Still, that doesn’t mean these reductions aren’t painful to see.
However, those below inflation are harder to stomach, especially on children’s accounts. Adults are used to fluctuating rates. For better or worse, adults understand that these things happen. But seeing children’s accounts subject to the same rate reductions as adults put parents in a dilemma. It can be hard to explain to children why these things happen. Financial matters at this level are affected by so many factors, many of which are beyond a young child’s understanding.
A New Opportunity
If your child’s savings rate has fallen below inflation, you have the chance to teach a valuable lesson. Instead of allowing the funds to languish in a less desirable account, you can give your child insight into shopping around. You can explain the basics of rate fluctuations, and show them that they can choose to look for something better.
Learning to compare offerings in an ever-changing market is a valuable skill. Throughout an adult’s life, finding the best rates for savings can yield notable results over the long-term. And, the same can be said when it comes to acquiring debt obligations. Introducing these ideas to children at a young age can make them more comfortable with making changes when it makes sense to do so. Just because something was a good deal before doesn’t mean it is today. When that happens, it can pay to explore your options.
Granted, there is no guarantee that making a switch will permanently yield better results. But, with rates hovering so low, it isn’t a bad time to consider the experiment. If you can’t find a better rate elsewhere, you have still presented a valuable lesson on personal finance and the management of one’s money. Regardless of the outcome, you have given your child a new tool for future success, and you may find a better rate along the way too.