If you want a good chuckle, ask a young person if they know what a 401(k) is.

The other day I met a woman who shared with me that their local Girl Scout troop is working through a terrific personal finance program.

One of the objectives of the scouts program "Got Money" is to help girls understand financial topics and terminology for present and future use, such as the popular 401(k) retirement plan. The funny part occurred when the girls in this particular troop were asked if they knew what a 401(k) was.

Apparently two of the girls were eager to share their thoughts. The first girl was confident it had something to do with a running event -- think 10k. Turns out her dad runs in lots of 10k races. The second girl got excited because she thought a 401(k) had something to do with "bling" -- as in diamonds or more specifically the size of the diamond -- think k as in karat. That would be some rock!

I’m not suggesting this little exercise as a way to make fun of kids, but rather to make the point that most young people need an adult to explain adult savings concepts like a 401(k). And it's best to do that before they head off to college or enter the "real" world.

A minority of young people take a personal finance class as part of their secondary or collegiate experience. In fact, very few business schools at the university level require their students to take a course in personal finance. For most business schools, it’s only an elective. I get how the English majors might miss out on this, but business students?

The financial literacy rate in America is appalling. I believe it’s a crisis on several levels, but most certainly as it impacts our ability and desire to save money.

In a recent New York Times article on Social Security reform, Federal Reserve Chairman Alan Greenspan said that private accounts would do nothing to increase national savings, which he said was the crucial underlying problem.

Kudos to the Girl Scouts for making it a priority to teach girls personal financial management. There is no time like the present to demystify financial concepts for young people. Developing healthy financial habits means starting early and staying the course. And who knows, you too might learn something along the way.

Take the adult version of a 401(k) and make it kid friendly. Here’s how:

1. Consider matching a percentage of every dollar your child puts into long term savings (for many families this is linked to educational experiences like a summer learning camp or college).
2. Establish a few simple rules and goals for the program (e.g. how frequently you will contribute your match, if there will be a cap on your contributions, what the money will be used for, where it will be invested, etc.).
3. Once they’re up and rolling, review their progress every quarter. It can be a great way to build their financial vocabulary and to keep them motivated for the long term.
4. If you participate in a 401(k) or similar retirement plan, consider sharing your statement with your child to reinforce the priority you put on saving.

Why is it important to show your child the different ways you save money?

Consider all the ways you currently save money – short term and long term. Think about how you can you use each one to build your child’s understanding of how much you value saving.

This question is designed to build on the Share-Save-Spend tip for the week and can be used as a springboard for additional conversations with family and friends.

Tapping into your 401(k) funds could soon become as easy as slapping down some plastic at the checkout. A controversial plan to create a kind of 401(k) credit card -- you would use it like ordinary plastic, but the money would come out of your 401(k) account in the form of a loan -- is gaining some momentum.

Source: Business Week (Nov 3, 2004)

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