Back in 2008, Holly P left a comment on J.D. Roth's article about teaching kids to invest saying:
“I'd love to know how your sibling got your nephew to think about actually saving. Despite repeated efforts to get them to save, my kids want to spend every cent as soon as it hits their palms.”
It's a common problem for parents. They see the need to teach good financial habits to their children, but the realities of finding what works for each child complicates their discussions about money (as Lisa Aberle explained in her recent post, “How to raise a frugal child.”) The comments are like a treasure trove of great advice on just about every post, but Troy's response to Holly P's quandary years ago really stood out to me as a particularly good approach:
“… I tell my kids that each December I will match 100% of what they have saved and not touched for the previous year. They get $20/month, are required (our rules) to save at least 20% of it, but can save as much as they like. My wife and I match their YTD savings (not cumulative, but what their new savings this year) 100% each December when we get our bonuses… they LOVE that, and it's a great incentive for them to save. They also understand that whatever they save is to STAY in savings or be moved to other investments… once they put it in the savings pot, it stays there. The siblings see how much each other's “net worth” has grown to, and given that they all receive the same “income”, but have very different “net worths”, the power of saving early and holding it is peer-driven.”
Sometimes rearing kids feels like so much trial and error, but Troy's approach employs all the elements of teaching the principles of net worth you could ever hope to have in one simple, fair, incentive-laden technique!
The point of saving
At Get Rich Slowly, we naturally concentrate on saving money as an important discipline to develop in our financial lives. But it's not about saving for the sake of saving; it's about adding to your net worth every year — year after year.
It's also about starting as early as possible to maximize the power of compounding. And so what could be better than to help kids understand the concept of net worth while they are still young?
Even though our children are in their 20s and 30s now, it's not too late to open the conversation with them about net worth and how to build it. I think they will welcome any discussion that has their best interests at heart. Still, as important concepts go, it isn't necessarily the easiest thing to convey to kids, especially if they're young.
How did you learn about net worth? If you have children, how do you teach them about net worth?