These days, behavioral finance apps that “trick” people into saving are all the rage. Most work by automatically transferring small amounts of money from checking to savings based on an algorithm, like rounding up each purchase or looking for surplus cash. The PTMoney blog reviews several of them here.
These new apps can be a real boon for parents struggling to save money for their kids to go to college.
Here’s another auto-savings trick to consider: give your kid an allowance.
To save money?! Sounds ridiculous, right?
Well, here’s the secret to making it work: split the allowance payments between buckets. You know, like the classic spend, save, give jars. But, instead of having just one Save jar for your kid’s random purchase goals, add a long term bucket too. Set the clear expectation that the fractional allowance payments accumulating in this bucket are earmarked for college only.
Pro tip: to boost savings further, offer a nice aggressive parent-paid interest rate to be applied each week.
If you start this process early, your youngster can amass some significant funds by high school graduation day. Run the numbers in this Google sheet.
Suppose you use America’s most popular allowance formula of $1 per year of age, start early at the age of 5, allocate 20% to the college bucket, and accumulate through age 17. Then your kid will have $3,521.87 sitting in the college bucket when the time comes to matriculate.
And if your kid kicks in portions of birthday checks, holiday checks, and paychecks along the way, the grand total could be dramatically higher.
This is just the kind of automated “savings trickery” that parents are doing with our family finance app.
The extra college savings are good, but there’s a side benefit that may be even better: shared skin in the game. Every week for years on end, your kids will have actively participated as investors in their own college education. You can bet that sense of financial ownership will translate into a more frugal and focused college experience.
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