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Tips for Parents - Four-Bank System

Tips for Parents Four Bank System Consider how we, as adults, use money – we do more than just pay routine bills. We save to spend: to buy a plasma TV. We also save for the unexpected, so we build an emergency fund. We invest our money for far-off needs, like college educations and retirement. Many of us want to help others, so we set money aside for giving. Managing money means we tuck dollars away in compartments to be used in different ways.

We must help our kids learn to “compartmentalize” and manage money. Otherwise, they will get into the habit of regarding their allowance as money they can spend entirely on things like movies, toys, music, and clothes. It’s not a realistic view of money. As adults, if they treat their paychecks the way they treat their allowances they will be in real trouble. That’s why we need a better bank: to teach a more complex money lesson.

Here’s an ideal way to teach kids to compartmentalize money. Instead of one bank, try four.

* A spending bank for money to be used soon.
* A saving bank for money to be used later.
* An investing bank for money that will grow on its own.
* A giving bank for money to help others.

money jars imageDo you have to purchase four banks? Well you can, but you can also start out this adventure with containers as simple as plastic zipper bags. Banks that are transparent are more fun for children. They can watch their money grow. You can use –

* Glass or clear-plastic jam or pickle jars
* Plastic water or wide-mouth beverage bottles
* Cylindrical potato chip containers

Label each bank
Take four containers and label them Save, Spend, Give, and Grow.

Decorations: visual incentives
By turning the project into a fun activity, you make the message memorable. Decorate each bank using stickers, images cut from newspapers or magazines, or drawings to illustrate your child’s money goals. What do you want to buy? Save for? Support a cause?

Back to basics
This four-bank idea will get you talking to your kids in a very practical and comfortable way. You may find that this system can actually remind you of the basics that we as adults often forget when we’re dealing with larger amounts ourselves. But be forewarned: As your children learn the principles of the four-bank system, these smarter kids will begin watching more closely how you model good money management at home. Your actions always speak louder than words!

Dividing money among banks
You should decide what part of your child’s allowance or gift money should go into each of the four banks. Once you’ve decided, stick to your plan unless there are really good reasons to change. You are trying to teach your children a routine and a discipline that will protect them financially. If you are constantly adjusting or making exceptions, the child loses the idea that there is a system at work.

The Four-Bank System teaches children to divide their money so they can use it different ways. Want to know more about talking to your child about each of these ways? Click on the highlighted word in each bullet.

* The Savings Bank
* The Spending Bank
* The Investing/Growing Bank
* The Giving/Donating Bank

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The Saving Bank

Watch it grow together
When you save money, it grows. That’s the first message you can help your child understand. You can easily drop coins into the bank, illustrating how at the end of 4 weeks and 4 “deposits,” the amount within the bank grows. (This is the value of a bank with transparent walls. Children can watch their money accumulate.)

Coins grow into dollars
When you save, coins turn into dollars. Now empty the bank and cash-in 4 weeks of coins for paper money. Put the paper dollars back in the bank, along with the extra change.

Keep saving – money grows
When you save over time, money really grows. Now show how the amount of money builds over several months. Drop in the coins. Count them weekly and trade them for bills.

About interest
Savings plus interest equals even more money. Talk to your child about interest — begin by explaining that interest is the money a bank pays savers for holding their money in the bank. You can illustrate the idea by adding a nickel to each dollar your child saves. Count out $10 singles, and then place 10 nickels on the table. Help your child count the interest. Your child will discover that he or she made 50¢ just for keeping money in “savings.”

Matching money saved
Begin a matching program. Create a further incentive. A parent, or maybe the child’s grandparents, can pledge to “match” any money the child saves. Every two weeks, the “matchers” and the child can sit down and count the total so your child can see matching in action.

Help your child plan
Work together. You and your child should decide what portion of savings should go to short-term and long-term savings goals. Have your child draw or find a picture that illustrates a short-term goal, like a book or a toy. Another picture could show goals that are very far away, like a video game system or computer.

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The spending Bank

A Wish list
List the things you want to buy. Kids want so many things. Help your child think through what is reasonable and what he or she can afford. Making a wish list helps kids stay focused. Next, approximate the price of the things on the list.

Can’t have it all
Understand that some items are more important than others. Explain to your child why he or she probably cannot buy all the things on the wish list at once. Here’s a chance to talk about basic concepts in money management:

* Making choices
* Evaluating cost – what’s affordable or reasonable
* Weighing tradeoffs in a purchase decision
* Delaying purchases
* Dealing with opportunity cost – whenever you buy one thing, you’ve eliminated the possibility of buying something else

Work with your child to rank the items on the wish list – what to buy first, second, third, etc. Help your child go over the list every few weeks to see if new things should be added, or old ones dropped, or items moved up or down on the list.

Wise shoppers
Look for good deals. Before a purchase, help your child “price shop.” Compare prices from store to store. Or scout out prices in newspaper ads or on the Internet. Teach your child the value of doing pricing homework before spending.

Stretching your dollars
Count up the savings. If your child is able to buy an item on sale or find a better price at one store than another, count up the money saved. Drop the saved money in the Spend bank and talk about how that money is already giving your child a head start toward saving for the next item on the wish list.

Decorate the bank
Stay focused. Cut out or draw pictures of the #1 item on your child’s wish list.

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The Investing Bank

The time factor
Investing is for a long time. Point out the difference between money that you save to spend pretty soon – or in a month or two – and money you save for a long time. The money that children save to buy a car or go to college will be saved for a very long time. People like to make that money grow over the years by earning interest, not sitting in a bank at home. The Growing bank helps kids keep the money until there is enough to invest.

Growing money
Making your money earn money. First save a sum of money that’s pretty big – a target of, say $20 or more (whatever is appropriate to the age of your child). When you’ve reached your target, it’s time to move money out of the Growing bank and into an investment where it will earn interest. Help your child remember what interest is by returning to the dollar and nickel activity in the Savings bank page.

Take a trip to the bank
Start with a bank deposit. If you put your money into a savings account, the money will be very safe, but it will earn only a little interest.

More risk
Other investments. Explain to your child that there are other places to put money. You’ll find more information under the Fun for Kids tab. Within that Investing section, you’ll find simple definitions of different types of investments: US bonds, CDs, Money Market Funds, Stocks, and Collectibles. Tell your child that investing in a place other than a savings account typically earns more interest than a savings account at the bank.

Which one’s for you?
Pick an investment that fits your comfort level. Explain to your child which investment you are going to choose to help his or her money grow. Plus, explain how the investment works. You’ll find simple explanations in the Investing section.

Older children
The concept of risk. This is really a concept for older children. It might make younger children nervous about the safety of their money. Many families start with US bonds because they are backed by the federal government. If you put your child’s money in a non-guaranteed investment, like mutual funds or stocks, make an activity of tracking the money’s progress: you and your child should watch the newspaper or the Internet to see how the investment is doing. If the investment dips, don’t react in a way that will make the child anxious. Keep sending the message to your child, We leave money in an investment a very long time. The money will have its ups and downs. Just like we all have good days and bad ones days?

Decorate the bank
Stay focused. Decorate the bank with pictures of your child’s long-term goal, a car, college, or a trip abroad.

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The Giving Bank

Explain sharing
I feel good sharing what I have with others. For many families, giving is as important as saving. If that’s your philosophy, begin early explaining that a certain amount of your child’s money should be set aside to help people.

Investigate your options
Who decides? The whole family can pool its money and give to a single or a few agreed-upon causes. If so, the family should meet and decide together, weighing the pros and cons of the various organizations. A child might want to give toys to other children through programs like “Toys for Tots.” In most cases, giving is a very individual thing. A child who has lost a grandparent to a disease may decide to support the search for a cure. If so, help your child find a reputable organization that supports such research. One place to start is at the Better Business Bureau’s website,

Celebrate generosity
Recognize the donation as an accomplishment. When the child has enough money saved to make a donation, turn that donation into an event. Carefully count out the money, and then write a check to the organization. You and your child should mail the check together and talk about it at the dinner table and with friends.

Send the message
Talk about helping others. Whenever you can, make the point that we all help each other. Show it in small ways. For example, ask your child to move an elderly neighbor’s newspaper off the lawn onto her porch as your child passes the house on the way to school. Work from very local events to more national/international ways that families help others.

Help you child plan
Set your giving goal. How much to give? Kids with generous allowances and not many expenses can afford to give more. If the allowance is used to pay many or most of the child’s expenses, then the child might give less money but give his/her time instead – volunteering.

Illustrate the point
Add it up. Help your child understand how a little donation grows. If your child gives 50¢ a week, at the end of 6 months, he or she will have $13 to donate. Count out the coins to make your point.

Decorate the bank
Stay focused. Decorate the bank with pictures of a cause that your child wants to give to.

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Categories : Finance    Themes : Learning Investing Childrens
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