6 Ways Your Kid Can Build An Emergency Fund

Emergency Fund for Kids

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.

  1. 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.
  2. Take a Percentage – Most children have some sort of income.  They have an allowance, a part-time job, receive money for birthdays and holidays, or get Grandpa’s extra change.  Encourage your  kids to save 20% of their money off the top (pay your self first) and put it into savings.   When it comes to monetary gifts, encourage them save a higher rate such as 50%.  Once your kids have saved up enough money for their emergency fund, then have them switch their savings to another goal.  Remember, you are trying to build habits here.
  3. Pick a Dollar Amount – Have your child put back a certain dollar amount each payday.  While this is less preferable to the percentage approach, you want to do anything you can to build the habit.
  4. Make It a Competition - There are many competitive kids out there and you may have one of them.  If this is the case, give your child a BHAG (Big Hairy Audacious Goal) to meet and watch them go.  You can do this by making them a bet and giving them a reward.  “I bet you cannot save X amount of dollars by X date.  If you do, you can do X. “
  5. Give Seed Money – You can be gracious and give your child part of the emergency fund as a gift.  This shows that you are putting your money where your mouth is.  Do not give more than half of the funds to your child as you want them to do the hard work and build the habit.
  6. Segregate the Money – Savings and emergency funds should always be kept in a different account that is harder to get to than spending money.  Open up a savings account, a second checking account, or even use an envelope held by Mom or Dad.

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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