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Kids and Money: The Value of a Matching Contribution

One 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 [3] 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 [4] or allowance [5], 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 [6])