Interest and Parenting
I often have a hard time explaining to my kids why they should put some of their money in the bank.

My 9-year-old daughter -- the crafty genius of the family, really -- had me at one point when she asked how much she'd be paid for trusting the bank with her cash. The honest answer is that she'd get paid basically nothing.

That naturally led to her asking what the point was in putting her money in the bank, making it harder to get to, especially when she isn't already a spendthrift.

My answer was essentially what it had to be: because putting money away for later is a good habit. Rates will rise at some point and she'll be paid more. For now, let's just build the habit, I argued.

"But honey, you'll earn a whole 9¢ in interest!"

Let's be clear that I'm not talking about college savings in this article. My wife and I sock away some money in 529 accounts for each of our kids whenever we can. Instead, I'm talking about a savings account my daughter owns: a mechanism designed to help her save for stuff she'd like to have.

Therein lies the problem. Record-low interest rates make for laughable returns for the average savings account: The very best savings deal published by Bankrate (RATE) offered just 1.05% for balances above $25,000 as of this writing, and just 0.90% for other accounts.

Many big-name banks offer 0.10% or even less. Among the better-known names, American Express (AXP) and Discover Financial (DFS) offer accounts that pay 0.85% and 0.80%, respectively, Bankrate reports.

Banks aren't doing me -- or any parent -- a favor by offering my kids essentially nothing for their cash. Under the best of circumstances, my daughter's $100 would earn her just $0.09 per year -- nowhere near enough to buy anything matters to her or any kid.

But it's worse than that. Bankrate shows that most mortgages now cost about 3% annualized, which means the vast majority of institutions that pay well below 1% on deposits earn 3% or more on the funds they've borrowed to lend to others.

Tim Beyers

What's the Point?

Banks have a right to make money, of course, so that delta shouldn't surprise me or anyone else. Yet I have a hard time arguing that saving is a wonderful thing to do when I know from experience that there are plenty of other ways to earn more.

It wasn't always this way.

My parents opened a passbook savings account for me when I wasn't much older than my daughter is now. Double-digit interest rates were the norm then, transforming every $100 or so I stored away from income earned as a newspaper carrier into $10 or more for every year that I kept the cash squirreled away.

My problem wasn't a lack of savings options. My problem was that, in spite of the remarkable rates I was being offered, I too often chose to spend on fast food, movies, and comic books. Only one of those (i.e., the comics) still has any meaning or value to me.

I Fear for Her Future

That's why it matters to me that my daughter comes to appreciate savings as a habit now, while she's still young, in order to avoid growing up as a spendthrift who struggles with debt as I have.

I'm also concerned about external forces. Between deficits, deflation, and the incessant political bickering among politicians who at least partially control the financial future of the United States, I wonder if any of the financial systems that have been in place to support prior generations -- Medicare, Social Security, tuition assistance, etc. -- will even survive to her adulthood.

Paranoia, you say? I suppose that comes with being a parent. But if I'm right that long-held safety nets are in the process of failing, my kids will need to cultivate the savings habit as a means of survival. And I've got to do all I can to help.

My next article for DailyFinance will explore some ideas for helping parents build the savings habit in their kids. Care to contribute? Leave a comment below to share your own struggles, suggestions, and successes.

Motley Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. The Motley Fool has created a bear call spread position in American Express. Motley Fool newsletter services have recommended writing a covered strangle position in American Express.

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Geez, to any investment broker and get away from that savings pass-book which has been obsolete for at least two generations, if not more. Even a guarenteed income fund will get you four-five percent if you pick the correct one.

August 15 2012 at 10:26 PM Report abuse rate up rate down Reply

Ok fool, set up a treasury direct account and have her buy I Bonds. You can buy them in amounts above $25.
I won't bore with you numbers but they are much better than the banks.

August 15 2012 at 1:32 PM Report abuse rate up rate down Reply
Brek Randolph

Maybe he should look for safety and encourage his daughter to turn her fed notes into old silver coins? She could save them in her piggy bank. The day could come when she will be the only one in the family with something that is real.

August 15 2012 at 1:24 PM Report abuse rate up rate down Reply

And we should listen to an article written by someone who cannot even get the interest that can be earned on $100.00 correct. Though it is an insignifcant amount of money the fact it that $0.90 is quite a bit different from $0.09

August 14 2012 at 3:53 PM Report abuse rate up rate down Reply

One more thing, I'd make sure my children had retirement accounts set up at an early age. Compound interest is a great way to make your money grown. You can withdraw money for your first home, college and for certain kinds of medical bills without a penalty. If they start now, they can leave the house sooner. They don't have to go to college and then move home. All I know is, I moved out when I was 21 and purchased my first home at 25. My home is almost paid off now. Kids need to learn how to save.

Even though banks are not paying much these days, a good mutual fund can and does. I know because I been investing in no-load mutual funds for years. I micro-manage my retirement fund! I don't rely on other investment firms telling me what to invest in. Investing is a great way to save for your future. I've been making a nice return on my investments, too.

I can't see why it would be so hard to teach children to save when there are incentive plans out there, regardless of what banks are paying in interest. In many states - not all - retirement funds are exempt from creditors, which makes it a nice way to save a lot of money, knowing nobody can seize your assets if someone tried to sue you. That's one good reason to put as much money in one as you possibly can! :) When you retire, and you don't need to solely rely on SS, you'll be very happy! :)

August 14 2012 at 2:56 PM Report abuse rate up rate down Reply

Right now, the banks are paying nothing on your money. But, at least it is safer there than under the bed.

August 14 2012 at 2:37 PM Report abuse rate up rate down Reply

What you should do is give her an incentive to save. Tell her that if she saves so much money, you will give her an additional $50 or $100 to add to her savings account. That should give her some motivation. Additionally, you should tell her that she does need to do a few chores around the house. Don't give the money away for nothing. My family is very wealthy. I was pretty upset when they made me get up and get a job as a teenager, only to pay them rent once I turned 18. I couldn't figure it out as a teenager. My family made the kind of money people only dream about. Looking back, I see why they did what they did. I can really appreciate how much they loved me by making me work and making me give them money. They never kept any of it anyway. When I got old enough, and left home, they gave me all the money back. They saved every penny I ever gave them and handed it to me the day I moved out. They just wanted me to develop a good work ethic. I thank God for such an amazing family.

Even to this day, I still believe it's important to teach your children to work hard and save money in an ethical fashion, just like they did. They taught me to save diligently! You need to do the same.

Getting back to my story, if you can't afford the extra $50-$100 then tell her you'd give her $25. Say for every $100 you save, I'll give you $25. In my family, we have a lot of money so, in general, my family told me that they'd match whatever we saved, but if you're on a budget, try giving a twenty-five percent match.

August 14 2012 at 2:28 PM Report abuse rate up rate down Reply
Richard Gassen

One of the ways the banks screw over the average depositor is by offering simple interest, which is interest only on the principal. They should be offering compounded interest, which is interest on the principal plus the interest earned. This seemingly small issue is part of a much bigger and more problematic picture: The little people have no one advocating for them. The banks can do as they please — unless, of course, the government (which should be the advocator for the little people but seldom is or can be) steps in and regulates the banks. Regulates, he says? Ooo, BAD word, especially in the minds of the conservative Republicans (and many Dems, too) who, as Reagan mandated, want to get the government off the backs of people who want to make as much profit as possible in our hallowed capitalist system. So let's cut to the chase here: If you're a little person, which most of us are, you're basically screwed. Because special interests have purchased the government and its control over legislature and policy-making decisions. Hey, it's only going to get worse — and a whole lot worse if the GOP takes total control come November.

August 14 2012 at 1:56 PM Report abuse rate up rate down Reply
1 reply to Richard Gassen's comment

It could just as easily be said that if the Democrats did a better job of teaching their kids about investing...they too could enjoy the benefits of capitalism....but hey, it's just easier to bash republicans, right?

August 14 2012 at 2:34 PM Report abuse +1 rate up rate down Reply

My son is 3 but already he's got one thing going. He rarely asks us to buy him toys because he knows once in a while he gets some but asking will just get a "no". He likes putting coins in his piggy bank. We talk to him about money all the time. I'm a sahm so things are tight. He sees us and hears us talking about things we are giving up because we don't have to money for it and he's sees and hears us talking about saving up for things and recently pay off my husband's er visit from April just yesterday. I want to be open with him about how these things work and the best thing we can do is set the example we want him to follow. It's also important to teach the value of people, not things. Banking isn't what it used to be and might not be the answer but at a young age teaching patience, self-control, discopline, and that waiting can bring bigger rewards will work. He sees our budget spreadsheet daily and knows that some things take time. There is money in envelopes for the things we really want and using it on other things means we can't get what we really want. He's learning about that too. He still thinks quarters are pennies, 3yr remember, but he knows they are important to hold on to.

August 14 2012 at 1:34 PM Report abuse rate up rate down Reply

Banks have traditionally been a poor saving investment... they are, at best, a wall safe. Savings expertise can be obtained through stock market investments, but risks are high... but again, the learning factor is high. There is no free lunch when it comes to education or savings... both are costly... and all the king's horses and all the king's men aint ever gonna change it.

August 14 2012 at 1:13 PM Report abuse rate up rate down Reply