Welcome to Asking for a Friend, Grow's new money advice column. Got a question for one of our money experts? Email us at firstname.lastname@example.org.
Dear Asking for a Friend,
We've officially reached the "money in cards" stage of celebration gifts for our preschooler. Our extended family sent him cards with $5, $20, and even one $50 bill for his recent birthday. All told, he got more than $100, which feels like a lot to entrust to a 4-year-old.
We're tempted to just deposit it into his 529 college savings account — it's not like he's lacking for toys. But it feels like a missed opportunity to teach him about saving, investing, and handling money. What would you recommend?
Bank of Mom & Dad
Dear Bank of Mom & Dad,
Incidentally, I hosted a financial makeover show called "Bank of Mom & Dad" many years ago. The premise was to provide financial advice to cash-strapped young adults, as well as their mothers and fathers who seemed to have become, as we called them, "enablers" of bad financial behavior.
After years of acting as ATMs for their kids, these parents, years later, found themselves regretting their choices — and were stuck supporting their now 20-something adult children who'd grown to become financially directionless and quite dependent.
All this to say that you have a tremendous opportunity now — at your child's young age — to provide a healthy financial foundation. Parents play a crucial role in educating their children about money, and it's never too soon to begin teaching the basics.
Now, with regards to this $100 birthday bonus, I agree that this is a lot to give to a 4-year-old. At this age, kids typically understand that you need money to buy stuff — and that's about it. They may not — yet — understand that money has many uses; that you can donate, invest, or save it.
My advice: Place the money aside for now, either in a college savings account or some other savings bucket. And perhaps for next year, ask friends and family to contribute to the savings, in lieu of cash. It grants gift-givers a greater sense of purpose and you can avoid the conundrum of trying to figure out what to do with said money.
In a few years, if your child grows curious about the $100 from this birthday, ask if there's something important he or she would like to use it for. Maybe the money has collected a bit of interest, and then you can have a discussion about the importance of saving and maybe even get into the power of compounding.
When your child turns 6 or 7, one idea is to have him or her decide on a savings goal, investment pick, or charitable contribution, and allocate all the year's earnings to this goal. Maybe it can even become a tradition. There are fun tools that can drive the learning home such as the award-winning Money Savvy Pig bank and the virtual allowance tracker Rooster Money.
Finally, while your 4-year-old may not be mature enough to make smart moves with large sums of money, don't underestimate his or her ability to notice positive financial modeling. As the mom of a 5-year-old and a 2-year-old, I know that my actions speak louder than words, so I try to be conscious of that. Grocery store trips are a perfect time to showcase positive modeling. For these trips I sometimes have them help me by preparing a list — and sticking to it.
While it's an exercise in discipline and consciousness around my own spending, it in turn becomes an early money lesson for my kids.
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