Teaching Children About Money
by Jason Dean
My wife and I brought our first (and only) child into the world on August 26, 2006. Long before that, we had discussed and planned how we would raise our children. My wife, for example, had been subscribing to Parents magazine for the previous nine years, and we had both entered college as Child Development majors. I, of course, went on to study Finance, and this article examines where these majors converge.
I did not have the best financial upbringing. My parents were perennially in debt — each of them even filed for bankruptcy while I was a kid — and they didn’t talk about money much. They also modeled questionable ethical behavior when it came to money matters, which I could tell, even at a wrong age, was wrong.
But my parents did do something right — they didn’t micromanage my money. Whenever my friends got gift money or earned allowances, they were typically required to put some in a savings account or, worse yet, give it to charity. I, on the other hand, was allowed to do whatever I wanted with my cash, and I think it taught my financial responsibility at a young age.
With this in mind, my wife and I had always planned to raise our daughter in a similar fashion, but to an even greater degree. We want to teach her about money at a very early age, and by the time she’s in middle school (or late elementary, even) we want her to be making most, if not all, of her financial decisions on her own — with our guidance of course. Why give a child $5 a week and supplement that with gifts and “entitlements”? It’s far better to give them $25 a week and let them make their own decisions, I think. It teaches them responsibility and to appreciate the consequences of their decisions.
Recently, I read a review at The Simple Dollar of the book, The First National Bank of Dad. Simple Dollar’s review is very thorough, so you should check it out, but here’s one point I thought was particularly compelling:
When I was a kid, the idea of putting money in the bank was incredibly boring. The biggest reason was that the rate of return was slower than molasses – a year seemed like forever to me then and thus waiting a year for $100 to earn $2 more was unbearable – why not just spend the money now? This made me not want to save – it made me annoyed by it because my parents would make me save anyway. I had a similar feeling about my piggy bank.
So how can you make it so that children want to save? You have to speed up the compounding to the point where they can see the benefit. Owen opened up â€œThe First National Bank of Dadâ€ for his children and invited them to deposit their money. He would pay them a rate of return of 5% a month – enough for them to grasp the idea. If they gave him $20 and let him hold it for a month, it would earn $1. They could also withdraw at any time. Owen managed all of this in Quicken.
If my parents had offered me that, I would have jumped all over it, and Owenâ€™s kids certainly did. On allowance day, theyâ€™d usually hand it right back – depositing it in the Bank of Dad – and heâ€™d give them monthly statements on their money.
The First National Bank of Dad is on my Amazon wish list, and I’ll be sure to give a full review myself when I read it.