I remember moving out of the house for the first time. I was so excited to have freedom and independence. I had good roots so I thought this would be easy. We were taught to be frugal by our Mother who could always make a dollar stretch. I had a budget in mind and knew what my bills were. I ate Ramen noodles. I shopped at the Dollar General Store to purchase my necessities.
As soon as I moved out, Murphy’s Law set in and my car needed repair. It was almost $200. I had spent my budgeted money for the month on bills and had blown the rest on my enjoying my independence. My car sat for two weeks until my next paycheck arrived. It took my whole paycheck. I also learned that you have to pay late fees if you don’t pay your rent and electric on time. I didn’t budget for that! The late fees turned my hill of debt into a mountain. That $200 emergency ending up costing me about the same in late fees. It took me several months to unbury myself.
What happens if you don’t teach your kids the importance of an emergency fund? That Play Station 3 you spent your hard earned money on for Christmas is now sitting at the pawn shop. Those credit card offers your child receives in the mail get activated and your kid has $2000 in credit card debt with a 26% interest rate. Your phone rings and you hear, “Mom and Dad, can I borrow $500. I promise I will pay you back.” What happens? You get sucked in.
So, how do you teach your kids to save for an emergency fund to use on that rainy day when Murphy comes knocking at the door?
How Much Money Should a Child Have Saved For an Emergency Fund?
The first thing you need to do with your kids is to figure out how much they need to have in their emergency fund. The rule of thumb (Dave Ramsey) is to have 3 months of income if single and 6 months if married. In most cases, your kids will be single (unless your 8 year old got married on the playground). Take into account their regular income sources and work with them save up 3 months for their emergency fund. Another approach is to help them think through all of the things they could “break” and have them save enough money to pay for the repairs. This could be $400 to replace their phone, $600 to replace your iPad, or even $500 to pay for the car insurance deductible.
Tip – Have your child save up enough money to pay the insurance deductible BEFORE they start learning to drive. This will drive home the responsibility required to drive a car.
Ways to Teach Your Child How To Build An Emergency Fund
There are many ways you can teach your child how to build an emergency fund and help them start that fund. The key is to start as early as possible – that means start right now! One thing to always keep in mind is that life has already taught you the hard lessons, but has not gotten to your kids yet. Take time to teach them as many lessons as you can the easy way. You may need to let them learn some lessons the hard way though. If you are teaching them the lesson, you can control how harsh it is rather than life teaching them the lessons the harshest way (i.e. putting your kid in time out versus them being thrown in jail). Once you start, build the habit and watch it grow.
- Be an Example – Most parents don’t talk about money in front of their kids and this is a mistake. You should talk to your kids about your money and your finances. You don’t need to tell them how much money you earn, but it is good to show them your budget, talk to them about how much things costs, and help them figure out how they can afford something rather than just saying we don’t have the money (Rich Dad Poor Dad advice). If you have an emergency come up, like your car breaking down, talk about it in front of your kids.
- Discuss how much it will cost.
- Talk about how much you have in your emergency fund.
- Work through other “cut backs” you could make to cover the expense.
- Plan on how you will replenish the funds from the emergency account once you remove them.
If you have not noticed from above, you have a very selfish reason to do this – if you don’t do it now then the emergency funds will come out of your pocket. So get started today. If your kids are receiving a regular income then they are old enough to save for an emergency fund.
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