Children and Money - The Rule of Thirds

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The Rule of Thirds is not only a great way to get children to learn the habit of saving but also serves as a nifty math exercise each and every time your child gets some money. It’s also a great way to show children that small but consistent savings really can add up over time.

The one thing you’ll never need to teach your children is how to spend money – particularly someone else’s. For children and adults alike, spending is easy, saving is hard. That’s because saving is a learned skill and, like most skills, it takes time and repetition. In 2012 the AICPA (American Institute of CPA’s) conducted a survey of over 1000 parents and found out that only 1% of parents say that their kids save any of their allowance. That’s just 1% of children who are already learning the skills, discipline and money-management lessons that will ensure a good chance of financial freedom in later life.

So to encourage your child to save money, introduce them to the ‘Rule of Thirds’. The Rule of Thirds is pretty simple habit to get into - and it works for everyone, not just children. When your child receives or earns some money, they should divide the money into thirds. One third goes into a long-term savings account (ideally an account that they never touch), one third goes to an account that they use for saving up for larger items, such as a bike, iPad or similar. The final third is money that they can use immediately (if they wish) on whatever they want. In other words, one third of the money goes into the bank, one third goes into their piggy bank at home, and one third goes into their wallet (if your child is too young for a wallet or purse, have another piggy bank instead).

If your child doesn’t have a long-term bank account, try to set one up as soon as you can and make sure you take your child along with you. Many people rarely visit a bank these days, at least compared to years gone by, and it’s highly likely your child will spend even less time in one in the years ahead. Check out which banks are kid-friendly and make it an excursion out for them when you go to set up their account. This will help your child be able to conceptualize where their money is going.

At first your child will not appreciate, or even grasp, the concept of long-term saving for items such as houses, cars or education. But that awareness will come eventually, especially when your child starts aiming for medium-term goals, like a bike or an iPad. Once your child starts to (willingly) allocate money from the ‘spend immediately’ account to go to the ‘medium term’ account in order to hasten the savings goal you’ll know the savings seed has taken root.

When your child receives or earns some money it’s up to you as the parent to remind them of the Rule of Thirds and encourage and compliment them when they act accordingly. You can set the RoT rule as a condition when the money comes in the form of an allowance or money earned for work, but what to do when the money is gifted? Let your child use birthday money and the like as they wish, but offer a little encouragement to stick to the rule. It won’t take long before they divide up the money on their own accord.

Some additional tips:
  • Encourage them count the money in their piggy bank frequently, or log in to their bank account to see the balance. This reinforces the steadily growing amount in their minds.

  • Whenever the bank pays interest on the amount in the long-term account, show your child the benefit of leaving money in the bank. Make it a big deal when they get ‘money for nothing’ in the form of interest rates (they’ll have plenty of time in adulthood to learn the reality!).

  • Don’t fret if your child spends all of their ‘immediate money’ immediately. That’s what it is for – impulse buys. Eventually your child will learn that a little less impulse spending and more medium-term saving will bring faster results for their medium-term goals.

  • Explain that they must put a minimum of one-third into the long-term and medium term accounts, but they can put more in if they want – but only at the expense of the tiers below (the ‘immediate’ account is the bottom tier, ‘long term’ the upper tier).

  • Get a specialist piggy bank that lets your child visualize the different categories of spending (or use three different piggy banks or some similar type of setup).

The Rule of Thirds is one money habit that is definitely worth teaching your children for, if they carry it through into adulthood, they will have the foundation for good financial management for the rest of their lives.