The “Parent Match” - Starting Kids on Savings
Our 5-year-old has certain tasks that he has to do because he’s just part of the family. However, this year my wife and I started giving our 5-year-old a dollar for certain “above and beyond” chores – unloading the dishwasher, pooper scooping, picking weeds, etc.
He needed a place to put this dollar, so I got him his very first wallet. After he had accumulated a few dollars, we took him to the dollar store and he bought a plastic plane that the dog proceeded to chew apart that night – ahh the joys of teaching about a sunk cost.
He continued saving in this wallet so I figured I might be able to start teaching him about saving and giving. I got him a giving envelope for church and then a “piggy bank,” which included an electronic vault that he had to open.
I had him alternate between putting the dollar in his wallet and his bank. He was, understandably, much more interested in opening the “vault” again and again than he was learning about saving. To make it a little more engaging, once he had a few dollars in the bank, I started sitting down with him once a week to count his dollars. For every 5 dollars he had in the bank, I told him I would give him 1 dollar – The Parent Match. The first time I did this he was very confused. He didn’t have to scoop poop to earn a dollar, all he had to do was save. I told him this was his reward for saving some of his money and not spending it all.
Over the years, I have heard the same concern from many clients who voiced something like “My child (or grandchild) doesn’t value saving.” I think the reason many young savers don’t value saving is they have not seen the fruit of that saving. If they save $100/month, any growth on that feels tiny. For example, a 10% rate of return is only $10. One of the ways companies encourage employees to start saving is by giving them a match. If you immediately get a 100% return by having someone else contribute the same amount for you, it is much more enticing. The Parent Match replicates this for younger family members who are not yet working for a company offering a match.
I have a client whose 14-year-old granddaughter lifeguards in the summer. Last summer she made $2,000. She told the granddaughter she would match up to $500 in savings. The granddaughter took her up on that by saving $500 of the $2,000 she made, and the grandparents added $500 to match it. I specifically suggested they cap the grandparent match at $500 so she would have spending money – it's also important to learn how to spend money on things that matter to you!
To really maximize the impact of saving, consider helping the child open a Roth IRA or Custodial Roth IRA if under age 18. If they meet the income limits, they can contribute up to their annual earnings or $6,000 (whichever is less) in 2022. They can then get started investing in the stock market and any potential growth would be tax-free in retirement! In the example above, we helped them open a Custodial Roth IRA and between the child and grandparent, they contributed and invested $1,000!
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.