Life Lessons | American Funds

Teaching children to save for their education.

Even young children can help save for their own education, and the important financial lessons they learn now can carry them far beyond their college years. While the destination of college is the goal, the journey itself can be valuable.

Father teaching child

Key takeaways

  • Talk with your child about how you make financial decisions and the value of working toward goals.
  • Explore meaningful ways to get your young child interested in saving for her own education.
  • Encourage new responsibility for earning, managing and understanding money as she gets older.

Start the conversation early.

Having children contribute financially to their own education is a financial education in itself. If you keep an open dialogue about money throughout your children's lives, facing the real world after graduation won't feel like such a huge adjustment.

Involve them in decisions.

This type of activity can be as simple as taking them along to the grocery store. Explain the amount you have to spend for that week, and how you budget for nutritional staples versus special treats.

Set an allowance.

The amount can increase as they grow and take on more responsibility. You can also encourage your children to divide what they earn into three categories: spend, save and give. Use jars or decorated envelopes to split the money and then count it with your children every month to see how the balances are adding up. Make deposits together into savings accounts and 529 education savings plans and read the monthly statements together. This basic budgeting exercise can instill strong financial habits that carry over into adulthood.

Show them how to budget.

Explain how you create the family’s monthly budget. Your children can put this practice into action by learning to manage the cash they have available. They can learn how to make their allowance last, or how to put a portion of any gift money they receive into their 529 savings plan accounts.

Share what you’ve learned.

Describe the lessons you’ve learned from your own life experience. Perhaps it was setting aside money for something special you really wanted. Or steering clear of impulse buys in favor of saving toward more meaningful goals.

Live within your means.

Explain the difference between paying cash or borrowing to buy something. In particular, talk about how using credit cards actually makes something more expensive unless you pay it off right away. In other words, your children should know not to spend what they don't have.

Set goals as they grow.

Discuss what it means to have a significant financial goal and work toward it over time. Does your child have his eye on a new bike? Talk about how much he'll need to save, and how he can put allowance or gift money toward that goal. You can explain that you're setting aside money for their college education in a 529 savings plan. Let your children know that starting early and starting small can go a long way toward reaching a financial goal.

Things to do next:

  • Work with your children to create a "spend, save, give" system for their allowances.
  • If you have older children, show them the balance of their 529 savings plans. Together, come up with a plan for them to help contribute.
  • Start giving your children their allowances every two weeks instead of every week. This change will help them learn to budget in order to make the money last longer.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. CollegeAmerica is distributed by American Funds Distributors, Inc. and sold through unaffiliated intermediaries. 

Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits, such as financial aid, scholarship funds and protection from creditors, not available through CollegeAmerica. Before investing in any state's 529 plan, investors should consult a tax advisor. 

If withdrawals from 529 plans are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. State tax treatment of K-12 withdrawals varies. Please consult your tax advisor for state-specific details.

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This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.