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How an allowance helps children learn about money

Saving helps children understand that costly goals require sacrifice: you have to cut costs and plan for the future.

Requiring children to save part of their allowance can also open the door to future saving and investing. Many banks offer services to help children and teenagers learn about personal finance.

A savings account is an excellent way to learn about the power of compound interest.

Compounding works by paying interest on interest. So, for example, one dollar invested at two percent interest for two years will earn two cents in the first year. The second year, the money will earn two percent of one dollar and two cents, and so on.

That may not seem like a lot. But over time it adds up.

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