It used to be a rite of passage: taking a child down to the bank to open a savings account, or giving a few shares of stock. This was supposed to instill a lifetime habit of saving and investing, reinforced by watching the “magic of compounding.”

Today the lesson can backfire, since interest earnings are so small and stock-market gains so volatile.

The average savings account pays just 0.229%, according to the survey. At that rate, $100 would grow to just $100.23 in 12 months, a very long time to a child of eight or 10.

Twenty-three cents doesn’t buy much. And a completely candid parent would explain that, with inflation taken into account, the child would really be losing money by saving.

There are several ways to reinforce the saving-is-good lesson under such circumstances.

Clearly, the first is to shop for a better rate. Ing Direct (Stock Quote: ING), pays 1.3%, for example, and UFB Direct 2%. Use the shopping tool to find others.

Next, a parent can emphasize that interest earnings aren’t the only reason to save. By forgoing small pleasures like candy bars, your child can build a fund for something much more satisfying, like a computer game.

Another option: Bypass the real banking system and set up an informal one at home, offering a more generous interest rate. For an 8-year-old, you could pay 5% a month, gradually reducing the rate until the child reached 11 or 12.

People who use this “Bank of Mom and Dad” approach say that to reinforce the message it’s worthwhile to provide written monthly statements, and to make each weekly or monthly interest payment in cash. That’s much more real than figures on a page.

Stock market “investing” can be handled in-house the same way. The child can be given an imaginary sum to invest in stocks of familiar companies, like McDonald's (Stock Quote: MCD), Nike (Stock Quote: NKE) or Mattel (Stock Quote: MAT). Then you can help the child track the stock online.

As with savings, the investing lessons are reinforced best if real money changes hands, so the child experiences gains and losses. If McDonald’s moves from $56 to $57, you can add $1 per share to the child’s piggy bank, then remove it when the price falls. Updating accounts once a week is enough.

To demonstrate both the risks and rewards of active trading, the child can be encouraged to shift from one stock to another, taking profits when the stock seems to have peaked and cutting losses after it falls. The child should be encouraged to keep abreast of news items on the stock. They can be found under “Latest Headlines” on the stock-tracking page.

Finally, the child’s results should be measured against a benchmark like the Standard & Poor’s 500. A separate fund can be invested in a pretend purchase of an S&P 500 index holding like the SPDR exchange-traded fund (Stock Quote: SPY).

This should be a buy-and-hold investment, to show how this approach often works better than the in-and-out trading the child might do with individual stocks.

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