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How to make saving easy for kids

We once read an article suggesting that a family should have 7 bank accounts in order to effectively manage their finances. Slightly over the top? Perhaps more attention grabbing than serious... I mean who has the time to manage 7 accounts let alone remember what goes where?

More recently we have heard all manner of ways suggested to “save” money including on debit and credit cards. Although both ideas are unacceptable from HootLoot's point of view, they do touch upon an important issue - separating money used for different purposes.

It doesn't matter whether you are an adult or child, the same basic principles apply – separating money that is for spending (now) and money that is for saving (later) is the first step to achieving your savings targets.

Dumping everything together in one bank account or piggy bank means that savings money could accidentally be spent, or worse “borrowed". This is where confusion begins and not only for people – there are countless examples of companies who got themselves into trouble this way.


Where do I start? 

For adults the practice is complicated by the nature of spending money – money to buy things I want (new phone, clothes) vs money to buy things I need (rent, shopping, utility bills). And also the savings money – money that I can access as I need it vs money I can't access now (eg Pension Fund).

Fortunately children are not forced to deal with many of these issues until later in life. Therefore they (or mum and dad for them) can start the process when life is simpler and add complexity when it arises.

When they are very young – it's all for saving as mum and dad buy everything they need. Ideally any money they receive (birth, birthdays etc) should be invested according to their goals. We have previously written about the subject of goal based investing - please take a look if you haven't seen it.

When they get a bit older and start to be more financially aware by managing their pocket money, then the issue becomes relevant. Financial habits have been formed by the age of 7, so hopefully mum or dad will get them into the habit of saving some of their pocket money each week from an early age. It doesn't really matter how much they are saving, but it is the fact that they are saving and learning the values associated with it that is important and will stick with them.

We suggest to use (at least) two different vehicles to save. These could be

  • 2 piggy banksor savings jars
  • 1 piggy bank or jar for spending money and bank of mum and dad for saving
  • bank of mum and dad for spending money and a bank account for saving
  • piggy bank or bank of mum and dad for spending and an ISA account for saving
  • any other combination that you can think of

It doesn't really matter what you choose (unless it is a large sum of money ), so it comes down to convenience and practicality. When designing HootLoot, we set out to make the Pocket Money Manager and Savings Goals features as flexible as possible so that you can accommodate almost any arrangement.


A bit old for piggybanks 

As they get older, the vehicles are more likely to turn into either bank accounts and Junior ISA. The advantage of a bank account is that it is a safe place to store money. Banks generally provide a free debit or cash card and don't charge to replace it when it gets lost or stolen. Further they do not allow overdrafts so there is not risk of overspending.


Is there a lesson in here?

If all these financial terms start sounding confusing, just apply the simple rule – only keep the money that has been allocated for spending in the standard bank account account and let your kids learn about budgeting when it doesn't matter.

What do we mean by this? At this age they can learn to budget their spending money from week to week. If they run out early, it's a good lesson when they have to come to ask for an advance. Later in life it's not so simple and may mean having to go without proper meals when they have spent their university grant on beer or can't afford to pay the utilities bills without running up credit card debt.

As parents you will have access to their account details on line, so will be able to see where and how they are spending their money.

We like to give our children enough freedom to spend their spending money where they see fit (within obvious reason) and to learn by making mistakes. We are concerned that in the long run, over monitoring will have negative implications and erode any healthy financial foundations we have sought to build.


Gettin' paid! 

Other than very short term goals, we do not believe that a bank current account, a debit card or any other non interest bearing vehicle is an appropriate place for savings. This money needs to work and benefit from the Power of Compounding, so needs to be put somewhere appropriate where it can grow. Otherwise you are passing the benefit to someone else or worse letting inflation eat away a large chunk of your kids savings – not very financially prudent.


Last but not least

Coming back to our 7 bank accounts example – we don't think this is a bad concept, just a bad way of going about it. Through HooLoot, we built the system to allow our users to create as many savings goals as possible. Each of these are in effect a dedicated “virtual piggy bank”, or “saving jar”.

That's our way of doing it, you may have another which works for your family and that's ok as long as the principle of separation is respected.


Don't forget . . .

Finally don't forget about charity! Charitable giving is an important value to learn, in one of the next posts we will see how to teach kids about giving and what are the best worthy causes for kids to give to. We will also explain how to easily put money aside for charity by using your HootLoot account! 



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