Teaching a 12 year old the merits of saving

I had a basic savings account and until I was around 14 or so, I had to put half my Birthday/Christmas money in there. After that, I was free to do with it what I wanted but usually kept doing the 50%.

Granted, I didn't spend it wisely when I was in my early 20's but it was a nice way to learn as a kid

I have heard of people opening a small account but to incentivize savings by matching the deposit.

If the child "contributes" $20, you match a certain amount. I think that would be a better way then throwing the money into a nearly interest free vehicle. Obviously, you have to set the matching amount to what you can afford.

I've established this arrangment with my God son and had very good results so far.

ETA: I think financial behaviors are developed early and I applaud your interest in fostering successful habits for your child.

Do a dividend based ETF.

No minimum, and they can actively see the dividend money coming in and buying more shares.

They can also actively see more and more shares being purchased with each quarter due to compounding even if they stop contributing.

Also, maybe look at using sharebuilder, it will allow them to immediately buy whatever they want without needing to buy in allotments of full shares.

If they can only put aside 20 dollars a month, they can still buy fractional shares of whatever stock.

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I have heard of people opening a small account but to incentivize savings by matching the deposit.

If the child "contributes" $20, you match a certain amount. I think that would be a better way then throwing the money into a nearly interest free vehicle. Obviously, you have to set the matching amount to what you can afford.

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This is a great idea.

Teach him about compound interest and the avoidance of interest on borrowing. 12 is a bit old for that. I learned about it at age 6 when my 1st grade teacher gave us round pencils from the local New Iberia bank.

The pencils showed how much money you could make by saving ten bucks a month for 10 years. It was thousands of dollars. I was fascinated with the numbers.

Of course, I had an advantage in understanding numbers at age 6 because I had been reading the backs of baseball cards since age 4.

My son is 7, and we are just starting down this path. Right now he gets the importance of and difference between spending, saving, giving, and investing.

I tried to get him to start a bank account this summer, but he didn't understand why not to just save it in his wallet instead of a bank account. I explained the concept of interest, so he asked how much he would get. With today's crappy interest rates, his reaction to the monthly amount was a puzzled look and the comment "that's not a lot of money." I honestly don't know how to sell him on a savings account with interest rates these days.

On the investing side, I have offered to match anything he puts up 100%. My parents did this when I was young, and I saved a lot in a DRIP. It is tough to decide between a DRIP, mutual fund, or something else. I want him to understand how the money is working for him without exposing him to a ton of market risk.

IMHO a great way to teach the merits of saving is to get an account established and tell him or her that the money is his to spend however he likes provided it isn't illegal.

You will have to bite your tongue quite a bit for awhile. Expect him to come home wearing really weird crap, buying toys that are played with for all of a week before breaking, etc. Tut-tut once or twice, but no more than that.

Eventually the kid will learn not to splurge on impulse.