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Kids and Money: The Value of a Matching Contribution

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Kids and Money LargeOne of the coolest ideas I heard recently deals with teaching children the benefits of maximizing their contributions. Many of us are familiar with the concept of the 401k match. At work, if your employer offers a match, you can get free money for your retirement account. What you put in, up to a certain amount, is matched by the employer and becomes yours after a set period of time.

A similar concept can be used to encourage your children to save their money, and get excited about watching it grow faster. By providing an incentive your children to set money aside for the future, you could help develop a good habit. I have yet to try the concept of matching savings contributions with my son, and I am considering testing it out.

Matching Contributions when Your Kids Save

The way this works is to provide matching contributions when your children decide to put money in a savings account. At the most basic level, you can match the contribution, dollar for dollar, when they set their money aside for the future. You can set it up however you want, though. I’ve talked to parents who offer a 50% match, so that if the child decides to put $3 in savings, the parents contribute another $1.50, to bring the total to $4.50. Another option is to offer a match on a sliding scale. If your child sets aside 20% of his or her income from a job or allowance, you can match it dollar for dollar. If your kid sets aside 10%, you can reduce it to 5o cents on the dollar, and then at 5%, you can match with 25 cents on the dollar. This will encourage some children to set more aside

With the matching contribution, your children can see their money add up quicker. This can get them excited about saving, so that they can watch the bank balance grow. For the future, this practice can provide your kids with a foundation that will lead them to take advantage of 401k match opportunities in the workplace. Plus, it will help build a nest egg sooner.

On top of providing a matching contribution, you can also have a “vesting” period. With most employer sponsored retirement account matching programs, there is a vesting period. Before you can consider the money contributed by the employer as truly yours, you have to be an employee for a certain number of years. You can set up a similar program with your children. They can’t withdraw money from the savings account until at least a certain amount of time has passed. You might decide that your child has to make regular contributions to the savings account for at least three years before he or she can withdraw any of your matching contributions. You will have to keep track of the portion of the account that constitutes your match.

Requiring a vesting period is a good way to help your child delay withdrawing the money. Plus, if your child gets the matching contribution from you, and then withdraws the money two days later, the purpose of the lesson has been defeated. However, if you are consistent in your efforts, and you provide a reward that your children can see grow, there is a stronger likelihood of the lesson sinking in.

(Photo: Memory_Freak)

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11 Responses to “Kids and Money: The Value of a Matching Contribution”

  1. ziglet19 says:

    I like this idea. My mom actually had me start a Roth IRA while working a high school job, and matched what I put in there. I think it’s a great idea, and would motivate some young children to save more.

    • Mike says:

      I hope she didn’t match it by putting it into your Roth, unless you worked for her.

      • Fat Bob says:

        Why not? I was thinking of doing this exact thing. It’s essentially as if the child put all their earned money into the ROTH.

        Obviously you’d have to have the child put their money into the ROTH and then give your money to the child. Do you think the IRS would have a problem with this?

        • Miranda says:

          Parents can contribute to their kids’ IRAs, as long as the contribution limit rules are followed, and as long as the child has some actual earned income.

  2. Jason says:

    Good idea, but I think the percentile matching and vesting notions may have to wait until your children are a little older, my wife’s eyes glaze over when I speak of the particulars of investing (even simple stuff like that), not because she doesn’t understand but because it’s boring.

    I’d say matching is a great idea (my parents did it with me for my first car), and vesting may be reserved for the nerdiest of households who want to spend time explaining the process, or just refer them to HR like our boss does.

  3. Love the matching concept and other incentives for saving – like awarding a hefty interest rate (which you can calculate and credit yourself since you won’t find much north of zero in a real bank). I’m doing what ziglet19′s mom did for my W-2 earning teens with the Roth IRA. Awesome approach! Here’s how it works:
    http://blog.famzoo.com/2011/04/pave-road-to-retirement-for-your.html

  4. Ben says:

    My parents did this for me when I was in high school and it was pretty sweet. They set a maximum match per year and I always hit it, didn’t want to pass up free money :)

  5. cdiver says:

    Interesting idea that could be incorporated into an annual school contract, pay for grades.

    • Frugal says:

      Ditto – 3 middle school kids – old enough to understand “free” money while staying on the top of the grades

  6. Shirley says:

    We have savings accounts for each of our grandkids. For each birthday they are given the oportunity to choose a $50 check or $75 in their savings account. Without exception now the larger amount is chosen though we did have one lesson well learned by a young teen. ;-)

  7. skylog says:

    i do not currently have children, but i think this is a wonderful idea. i am going to pass this along to several of my friends…


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