From Piggy Banks to Rainy Days: How to Teach Kids About Emergency Reserve Funds

By Alec Lindenauer, COR Chief Allowance Officer

The first time I really paid attention to the idea of keeping an emergency cash reserve was when I was introduced to it while studying for my CERTIFIED FINANCIAL PLANNER™ designation back in 2005. It was one of the basic tenets of their prescribed financial plan, and made total sense. The recommendation was pretty simple. 

The idea was that most people should have somewhere between three to nine months worth of living expenses as an emergency cash reserve at all times … Totally non-investable cash. If someone’s income or employment was more at risk, then they would have more of a cushion. And those who have more stable income and employment prospects might be comfy with a smaller cushion. 

While the amount is pretty subjective and personal, the idea of an emergency reserve is solid for a number of reasons. For starters, it might help someone avoid taking on debt. For others, it might help prevent a forced sell situation (having to sell your car due to urgent medical bills, for example.) There’s a good reason an emergency reserve is still one of the first recommendations for people seeking advice on CFP.net. 

And considering two-thirds of Americans can’t comfortably cover a surprise $400 expense, it appears they’re right on with that recommendation. Well, if a reserve is so valuable for adults, then it certainly has value to teach our kids about it today! I know I want my kids to be able to absorb a $400 expense, and I’m sure you do too.

As with so many of the Cents of Responsibility lessons, if we want our kids to learn this stuff, we need to figure out how to teach in a way they can benefit from experiential practice. So how do we do that with an emergency reserve?

When I began providing my kids with experiential practice opportunities with money in kindergarten and third grade, I did so with a four-slotted piggy bank. Whether they were dealing with money that was given or earned, they had ownership over their money to decide between Spend, Save, Invest, and Donate. Even today as teenagers, they do this on the first Sunday of every month … Our designated money day. 

As they grew out of their piggy banks, I replaced those slots with buckets. And when they were in sixth and eighth grade respectively, I knew I wanted to introduce the idea of an emergency reserve. Just as they were on the path to becoming mindful about their spending, saving, investing and donating, I knew the more they practiced building and keeping a reserve, the more likely they were to be able to repeat that behavior later in life. Fundamentally, it’s no different than the logic behind learning and practicing to ride a bike.

At the time, I gave my eighth grader a starting goal of $40 for her reserve. And for my sixth grader, I made it $30. It took them each a few months to save up, even while grumbling a tiny bit, since they didn’t see the point. But, I stuck to my plan.

In fact, fast forward a few months later to when my eighth grader had a cash windfall. She was fortunate enough to have one of those “rite of passage” celebrations, for which she received some very generous gifts. Recognizing the opportunity to teach, I increased her “target reserve amount” to $100.

If practice was the goal, well then I’m happy to report this is working like a charm.

Just recently, my daughter unexpectedly realized she was broke. She had miscalculated somehow, and was caught with a minimum balance on her debit card, and no cash. And to make matters worse, she was in debt to the Mommy-Daddy bank, since she had borrowed money, and was due for a payback in a few days. (It’s a long-established rule in our house that overdue debts come with a painful cash penalty.) 

As soon as she realized her miscalculation, I heard her say these magic words: “Wow, it’s a good thing I have that emergency reserve.” While it was somewhat under her breath, I heard it clear as day. And it was music to my ears. 

In the two years since I instituted the emergency reserve, they’ve each used it once. But I’ve also heard them refer to it often. So often, in fact, it’s become ingrained in their normal money routine. 

Dare I say, keeping an emergency reserve is now a habit. Isn’t that what we all want for our kids?