Is it ever bad to save for your kids?
I’m a big fan of parents saving for their kids. After all, Blue Tree is centred around kids’ saving / investing money and seeing their savings grow like trees, “Blue Trees”.
The question for this blog, however, is whether there can be any negative impact from saving for your kids? Surprisingly there are!
The potential negatives of saving for your kids
There is certainly a risk of saving too much for your kids if you fail to educate them in the process.
You have probably seen the headlines of lottery winners subsequently going bankrupt. This is because they didn’t manage their money well and overspent.
If you are saving for your kids and not telling them about it that means on their 18th birthday (or whenever you give them the money) they will feel like a lottery winner! Even a few thousand pounds can make a world of difference to an 18 year old.
Before I explain the negatives, I want to stress these are just points to be aware of. It’s not to say they will apply to all kids and I have no doubt many of you will have had differing experiences when you grew up. If you are aware of these potential negative impacts and manage them, then I have no doubt the savings you are making for your kids will make the positive impact you desire.
So what are the dangers we need be aware of when saving for our kids:
1. Potential to not work as hard
When your kids get something for nothing (like an 18 year old being given savings), then it can change how they see money. Why work hard for something when they can just spend the money given to them for ‘free’?
We need to make sure that our kids do not take this approach to hard work. Remember one of the drivers of working hard is the FOMO (Fear Of Missing Out). When I was growing up I worked really hard at McDonalds in the evenings and weekends so I could go and do fun things others were doing - I didn’t want to miss out. Money is a motivator. If I already had the money, I can now see how I might not have accepted extra shifts or worked as many hours.
2. Risk of overlooking ongoing costs (versus purchase costs)
A lot of people focus on the cost of purchase and not the ongoing cost of maintenance.
For example, say your kids had money to buy a nice car now as you had given them the required cash for it. That would be great. Although, like big lottery winners, a mistake they could make is that they don’t consider the maintenance expenses of all their purchases. Consider a car - insurance, road tax, fuel and replacement parts all still need to be paid for. These costs can take a serious toll on their money, especially if they have spent all their savings on the car.
Kids need to learn that they should not only buy things based on cost today, but also consider cost tomorrow before deciding if it is a sustainable purchase.
3. Living beyond their means
There is a strong perceived link between what we buy and our view of ‘status’. Don’t get me wrong, I’m really against people linking the two things but this is what most people do.
So if your kids use their savings to buy a flashy car, a lot of people will think ‘they are wealthy!’.
It is very hard for people to be perceived as one thing and then have to revert back to something ‘less’ in the future. It will also mean they are likely to want to have the clothes, the holidays and to go to the places where people with nice cars go. Again, this is generalising but is something to be aware of. All of these things can lead to our kids spending more in the future than they can actually afford.
So whilst they have the money, they need to be using this to help them to support a standard of living that is aligned to their earnings.
4. Not getting credit for their own achievements
This point is similar but different from the above. There is a real risk that if your kids get given money and spend it then other people might not give them credit for their work in the future. They could be classed as ‘rich kids’ or ‘trust fund kids’. Therefore if your kids work hard in the future then it might be hard for people to give them full credit as people will question whether it was really them that achieved financial success or in fact, their parents. Having their true success overlooked could affect their emotional wellbeing.
The above points demonstrate the potential negative impact handing over savings to your kids can have IF not managed. They may sound extreme but I really want you to think about how you are going to manage the impact of giving your kids money when they are old enough. Taking the time to think about this now will help ensure you do make the positive impact you want to make by putting money into savings for your kids.
Tips to help manage these risks
Habits: Make sure they learn about savings, not just spending. Their future financial wellbeing will be determined by the habits they form more than anything else. Make sure you help them form good ones before they get access to the money.
The three habits I’d recommend you help your kids to form are:
Get them to save at least 10% of all the money they receive [help them form their own savings mindset]
Get them to save up for something they want [Delay their gratification]
Get them to record how much money they have each month [what gets monitored, get managed]
Get them to contribute: As mentioned in the habits above, try to get them to contribute towards the savings themselves with their own money. This will help them take more ownership and not just see it as ‘Mummy and Daddy’s money’.
Let them see it grow: If they see the money grow over time they are more likely to want to preserve or use it sensibly rather than just spend it. We show our girls their savings growing as Blue Trees. One of the benefits of this is that they don’t like the thought of chopping down trees.
Have a purpose for the savings: Talk to them early about the purpose of the savings. Whether this is for a deposit due to house prices being high or to help them have an emergency fund. The earlier they have a clear purpose, the less likely they are to spend it on a whim.
Talk to them: Find opportunities to raise the potential negative impacts of having money (set out above) and see what they feel they need to do to address them. Make sure this isn’t a one-off conversation but an ongoing dialogue so that it sticks in their minds. As they grow up their thoughts and attitude will change so you need to ensure that their view on money is considered in parallel as they grow up.
Teach them about cashflow: They need to appreciate that wealth isn’t about what you have today but what money you have coming in versus going out over the long-term. Make sure they set out the ongoing costs of the things they purchase, especially things like cars or their first home. Here is a blog which will help - ‘How to teach your kids about: The Wealth Formula’.
Saving for your kids can really help them but just saving and handing them over a large pot of cash with no upfront management may have some downsides.
Don’t leave your kid’s future financial wellbeing to chance. Remember there are a million companies out there that will be trying to get them to spend all their money.
Now is the time to start talking to them.
I started Blue Tree to help parents teach their kids about money, so make sure you check out recent blogs. Also, make sure you subscribe so you don’t miss new topics and tools to help your kids get ready for the financial world ahead of them.
Thank you for reading!
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Book recommendation: If you enjoyed this topic then you are likely to enjoy the book 'The Millionaire Next Door' by Thomas J Stanley and William D Danko