It used to be a rite of passage: taking a child down to the bank to open a savings account, or giving a few shares of stock. This was supposed to instill a lifetime habit of saving and investing, reinforced by watching the “magic of compounding.”
Today the lesson can backfire, since interest earnings are so small and stock-market gains so volatile.
The average savings account pays just 0.229%, according to the BankingMyWay.com survey. At that rate, $100 would grow to just $100.23 in 12 months, a very long time to a child of eight or 10.
Twenty-three cents doesn’t buy much. And a completely candid parent would explain that, with inflation taken into account, the child would really be losing money by saving.
There are several ways to reinforce the saving-is-good lesson under such circumstances.
Next, a parent can emphasize that interest earnings aren’t the only reason to save. By forgoing small pleasures like candy bars, your child can build a fund for something much more satisfying, like a computer game.
Another option: Bypass the real banking system and set up an informal one at home, offering a more generous interest rate. For an 8-year-old, you could pay 5% a month, gradually reducing the rate until the child reached 11 or 12.