As we set our clocks back this Sunday for Daylight Savings Time, it is a perfect opportunity to talk to our kids about the importance of savings. I mean saving MONEY, not sunlight.
In fact, the editors at MoneyAndStuff.info propose starting a nationwide tradition of talking with kids about savings on the two days a year when we set clocks forward and back for Daylight Savings Time.
Daylight Saving Time (DST) in most of the United States starts on the second Sunday in March and ends on the first Sunday in November. That means almost all of us will set our clocks back one hour before we go to bed on Saturday, Nov. 6, or when we wake up on Sunday, Nov. 7 (in 2021).
Only two states do not participate in the clock change. Hawaii and most of Arizona do not use Daylight Saving Time. (The exception in Arizona is the Navajo Nation.)
Why the savings habit is important to financial success
The Federal Reserve reports that 39% of Americans don’t have enough money on hand to cover a $400 emergency.
The same report says that 71% of Americans have a savings account. Most Americans (22%) have $1,000 to $5,000 in savings. Another 56% of Americans have $5,000 or less in savings, while a third have $1,000 or less.
Savings are critical to financial success. A savings account provides a cushion for emergencies such as car repairs, medical expenses, veterinary bills, or time off work. Without savings, you may be forced to use high-interest credit cards, payday loans, or other forms of debt.
And getting out of that debt can often be very difficult.
Saving money for a goal is also a great lesson that will benefit your teen for a lifetime. Help them plan for a senior trip, a car of their own, or a new phone by building their savings.
A good rule of thumb is to save 10 percent of what you earn, and have at least three months’ worth of living expenses saved up in case of an emergency.
The easiest way to build a lifetime of savings is to start the savings habit early. Like with your first job!
Once your teen has a steady job, help them set up a savings program so that at least 10 percent of earnings goes directly into their savings account.
Help your teen track what they actually spend in a month. Talk about how to estimate three months’ worth of expenses, and how much to save from each paycheck to build up savings.
Talk about how to keep money in a safe place, like a federally insured bank or credit union. Explain that it’s better to have more savings—like six to nine months’ worth of living expenses, instead of only three.
Discuss how much your child can save. What will they gain? What will they have to give up? Is it worth it? Explain to your child that once she starts a job, she may be offered an account at work called a 401(k). Some employers provide matching contributions as an incentive to save, so it’s smart to save at least enough for the maximum matching contribution.
How compound interest grows your savings
The sooner you start saving, the faster your money can grow from compound interest.
Compound interest is when you earn interest on both the money you save and the interest you earn.
Show your child the following:
If they set aside $100 every year starting at age 14, they would have about $23,000 at age 65. However, if they don’t begin saving until age 35, they would have only about $7,000 at age 65.
The example assumes the account earns 5 percent every year. Experiment with your child to show the effect of saving different amounts at different interest rates.
You can use the SEC’s compound interest calculator to explain the concept and make a savings plan.
Most banks and credit unions can automatically deduct a portion of a paycheck for savings, so your child can build their savings without any extra work.
So as you set your clocks back this week, set your teenager’s financial future forward with a discussion about savings!