Teaching youngsters to save. Everything from piggy banks to brokerage accounts

What are some good ways to teach children to save? And how do the people who earn their living by giving financial advice teach their own children? Kathy Muldoon starts with lessons in the M&M economy.

``With very young kids we start with M&Ms,'' says Ms. Muldoon, a certified financial planner at Carter Financial Management in Dallas. ``It sounds silly, but it's a good way to learn about consumption. If you have 5 M&Ms, you have 5; if you eat 2 now, you'll have 3 for later.

``It's an opportunity for discussion; they can learn about delayed gratification, even at age 2, 3, or 4.''

It's also important early on to start conveying to children ``the family's value system'' as it relates to habits of giving to church or charity. ``This should be built in,'' Ms. Muldoon says, noting that ``even age 5 is not too young for the children to be putting their nickels into the pot'' at church -- ``if that's the family's value system,'' she repeats.

She feels allowances should be intended to cover truly discretionary items, because it's important for a child to have opportunities to make mistakes. ``But not all the money should be turned loose. Parents need to sit down with the children and decide what percentage should be saved.''

While just about everyone agrees that teaching children to save is important, there are varying views on what kinds of things kids should save for, and over what period of time. ``Kids are told they should save for a rainy day. Well, what's a rainy day for a 10-year-old? The things kids are saving should be fairly near-term goals.''

For a 9- or 10-year-old, a special game might be a good savings goal. By age 14, a child might be ready to save money to pay his or her way to visit a friend or relative.

In any case, the savings program should be ``on a time frame the child can understand, with an attainable goal,'' Ms. Muldoon says. A savings project that takes every nickel of a child's allowance for months is not attainable.

She goes on, ``For a child of 5 or 6, `tomorrow' is clear; for 10-year-olds, `next week' is something they can grasp, or maybe `in four days'; for 12-year-olds, `one to two weeks' is understandable.''

Ms. Muldoon suggests that children, in addition to their personal goals, be included in family savings projects. ``The child can understand that it costs $20 for the family to go to the movies on Friday night, and that it will cost $200 to go visit Auntie Jane. So if the family skips the movies once a month, in 10 months there will be enough money for the trip. . . . Saving can be a family activity. After a while the kids will start turning off the lights in the house.''

What about parents who are still struggling to master the savings discipline themselves?

``Kids pick up attitudes -- subliminally they get the message,'' she observes. A good example is better than theory. Everyone breaks down on this at some time or another. ``We say `Save!' and then we go out and spend.''

But if spendthrift parents want to encourage better habits in their children, there is value to talking up the idea of saving, even when the theory is stronger than the practice. Don't be tempted to make it ``easier'' for your children by practicing a form of ``payroll deduction'' on their behalf by setting aside savings ``automatically'' from their allowance, Ms. Muldoon warns.

Payroll deductions may be quite helpful to adults who would have difficulty saving without them. But they don't teach self-discipline, which is what children should be learning.

Judith Zabalaoui, of Resource Management Inc. in New Orleans, has had an opportunity to see how well her children absorbed her money management lessons: Both her son and her daughter are grown up now, and they have become, respectively, a financial planner and a banker.

``In teaching the children, I tried to take a page from the financial planning book. I encouraged them always to set an objective, and to get them thinking, `Always pay yourself 10 percent first.' These are two fundamental principles.''

She expects that the 10 percent saved will be put to use to fund short-term goals.

``If the child is told that part of his allowance is to be saved for college, that could be a negative enforcement. . . . My observation is that children cannot think in terms of college. . . . It's very difficult even for the most prudent adult to save 10 percent; it's very difficult to do anything without an objective.''

Saving to have spending money on a family trip is a good example of the kind of objective a child can be expected to work toward, Zabalaoui says. ``Children will spend more prudently when they've saved the money themselves than when they've just been handed some spending money.''

She adds, ``It's interesting to watch youngsters -- they like to fool with their money, handling it physically -- changing it, counting it. I guess you'd say they're very tactile.''

She figures it's not until about age 12 that they are ready to deal with the concept of a savings account at a bank or thrift.

Similarly, Ms. Muldoon advocates that small children -- under age 9 -- do best to have their wealth in visible form. ``For a very young kid -- under 9, say -- mayonnaise jars are good, because they're clear glass.''

Larry W. Carroll, of Larry Carroll Financial Planning Associates in Charlotte, N.C., has taken a different approach with his son, Kris, who is 9. They haven't got into the short-term-saving-to-spend concept. Rather, Mr. Carroll says, he and his wife have striven to get Kris saving 10 percent of his allowance long term. ``We've talked with him in terms of a college fund. Well, of course, I'm going to be supplementing that. But I like to think of him as saving for college.''

Since children are, after all, generally supported by their parents, their allowances go to relatively more discretionary expenditures than does an adult's paycheck. Thus, says Carroll, ``We could have him saving more than 10 percent, but we wanted him to get used to a rate he could continue all his life.'' (His parents, however, require that 100 percent of his ``investment income'' -- interest and dividends -- get plowed back into savings.

Kris also has a stock account at Merrill Lynch, where his mother is a broker. He owns shares in four or five companies, all of them ones he knows something about. ``He owns stock in the power company, in Exxon, in Horn & Hardart, which owns Bojangles, a fried-chicken chain that's popular down here,'' Carroll says.

Financial planners almost always suggest that small investors who want to invest in stocks should do so by means of a stock mutual fund instead of buying single issues. Carroll says that might be been a good approach, ``if you don't have a strong educational objective.'' His son, he says, ``has done OK financially. And he understands he owns a piece of the company -- to the point that if we need gas, he'll suggest we fill up at Exxon.''