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How I Got My Kids Excited About Saving and Investing

by Darwin on December 9, 2012

I credit a great deal of my financial and career success in life to the way I was brought up and the lessons I learned early in life.  When I look around at adults my age that make very poor financial decisions and have their finances in tatters, I also see a pattern where their parents aren’t very good role models (i.e. close to retirement and in debt themselves, still leasing over owning, no clue how to manage money or invest, etc.).  This survey showing the horrible understanding of finances most Americans possess says it all.  I don’t know if there’s a quantitative study out there showing how far the apples fall from the tree, but based on my own anecdotal observations, I’d wager that there’s a very high correlation between financial aptitude and success of parents and that of their children later in life.  That being said, I wanted to start instilling the virtues of saving and of course, the #1 success factor in life, in my children while they’re young.  My boys are 8 and 6 so I figure they can start to understand these concepts.  My daughter’s only 3 so she’s not ready yet.  Here’s one of the formal systems I’ve set up with the boys to get them excited to save:

The Bank of Mom and Dad

These days, with interest rates where they are, it’s tough to get excited over earning 5 cents a month in your savings account of a few hundred dollars (however, check out if you are in need of the highest yielding Savings and CD accounts).  At the same time, teaching a kid under ten about the stock market and having them invest in individual stocks is probably other their head (and counterproductive, since even most adults are better off investing in ETFs instead of stocks).  So, what’s a happy medium to get kids excited to save?  A very high yielding bank account of course!

I won’t beguile you with tales of how I found a great bank online that pays a high enough yield to get my kids excited about saving.  So what did I do?  I set up my own bank!  The Bank of Mom and Dad.  Here’s how it works:

  • Kid turns over their own cash to set it up.  They hand over their savings from birthday parties, allowance and holidays to me.
  • They can access this money any time they want.  This is important because it forces them to have the discipline to NOT tap the bank all the time.
  • I pay a very high interest rate.  I offer 5% MONTHLY yields.  I know, this sounds ridiculous at an interest rate of over 60% annually.  This would obviously bankrupt me over several decades.  But for a few years during their formative years, this is an expense I’m willing to bear to teach them the virtues of saving.  Anything less and they may be disinterested.  As you can see below, with my son’s starting $30 this is only costing me under $2 a month.
  • I set up a nice visual statement and chart so they can see their earnings over time.  I had also set up an example to project what will happen over time if they leave their money in the bank (below).  I set a quick basic spreadsheet in google docs so I can access it any time I want, life if we’re out in a store and a kid wants to take money out to buy something.  Boom – I remove it from their bank on the spot.
Since I just rolled this out, they boys are very excited about earning money for simply leaving their money with the Bank of Mom and Dad.  To date, there’s been some money my son’s saving for Disney World in his wallet earning nothing.  Now, he can make an extra buck or two a month leading up to our next trip.
What are Your Thoughts On This Method to Get Kids Excited About Saving?
Do You Have Other Tools and Lessons You Use With Your Kids?

{ 19 comments… read them below or add one }

krantcents December 9, 2012 at 2:19 pm

We insisted that our children save half of all money earned or received. As they entered their teenage years, I showed them how to inves their money in the stock market and watch it grow. It helped them earn oney to buy their first car.

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Darwin December 11, 2012 at 12:37 am

I like the 50/50 thing. Some parents even through in a 10% to charity in there. Not a bad idea, but I want my kids to give because they want to, not because they were forced to.

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Brick By Brick Investing | Marvin December 10, 2012 at 11:22 am

Great posts! My parents actually gave me an allowance and wouldn’t give me any other money. So if I wanted a video game I had to save up for it. If I wanted a haircut I had to save up for it. It worked great for me at the time, although I will introduce investing as well to my children when the time comes.

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Darwin December 11, 2012 at 12:37 am

I think we’ll be starting the allowance thing before too long too. But there’s another school of thought about paying by the job – so they don’t get an allowance for doing nothing. Not totally sure which shop I’m in yet.

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Brick By Brick Investing | Marvin December 11, 2012 at 8:22 am

I received my allowance when all my chores around the house were completed. That included trash take out, dishwasher, vacuuming, etc.

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JT December 10, 2012 at 3:44 pm

5% a month?! I can’t wait until you come home to an unregulated community bank in your front yard offering 1% per month.

My parents did a few things to get us to realize the importance of personal finance. One big one was involving us in purchasing decisions. Years ago I wanted to swap dialup and a landline for a cable modem and cell phones. My mom and dad were agnostic to the idea, but they’d do it if I could produce the numbers proving it was a better deal. They’re really good at outsourcing stuff to us by making it a game…my mom’s tricky.

I had to call the cable and phone companies to get quotes, figure out if the potential cost-savings were bigger than the added expense of two more cell lines, and determine a intangible value of a faster internet connection and cell phones for my brother and I. Just one example.

Any time any of me or my siblings suggested a new family expense, or a change to what mom and dad were doing, it required a logical written proposal. “Write me a proposal” became their default response to every question. I think it gave all of us an important perspective on how much money stuff actually costs…when you’re 13 and have virtually zero income, mom and dad’s $100 cable bill is not at all trivial. You realize that mom and dad are the sole reason you’re not starving, and their money is not, in any way, shape, or form, your money. Also, it forces kids to build a logical framework to tackle personal finance issues; that’s what finance is all about, being logical.

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Darwin December 11, 2012 at 12:35 am

I love the idea of written proposals! My kids ask for so much crap, the work that would go into writing up a proposal alone would deter them!

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Martin December 11, 2012 at 1:04 am

This is a great idea. A few weeks ago my wife and I were thinking how to make it attractive to our kids and somehow force them into learning about savings and investing, but we weren’t successful. I’ll talk to my wife and take this as an example. Do you keep their cash at home or did you set up a savings account?

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Darwin December 15, 2012 at 3:37 pm

I keep it at home in their own envelope. I want them to be able to withdraw immediately to force some discipline on them, and also, for them to see the dollar or two go in the envelope each cycle. It makes it more tangible than a paper bill. Plus since real banks pay no interest, I’d to add like $1-2 to their accounts each month which would be annoying

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Martin December 11, 2012 at 1:07 am

OK, my wife is asking, how old are your kids? Ours are 7 and 10. Time to teach them before its too late!

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Darwin December 15, 2012 at 3:38 pm

My boys are 8,6. 8YO totally get is; 6 sorta. My 3yo daughter wouldn’t get it so i didn’t even try yet

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101 Centavos December 11, 2012 at 7:17 am

The Bank of Mom and Dad is open and running in the 101 Centavos household. It even offers trust services, where deposited funds are invested in individual stocks.

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Darwin December 15, 2012 at 3:39 pm

I do want to teach the kids about stock investing later; I do worry about how losing money and volatility may deter them early on since a decades-long time horizon is tough for them to grasp. But granted, I’m in my 30s and 95% long equities.

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Kathleen, Frugal Portland December 11, 2012 at 6:09 pm

My parents offered 0% loans — that was the best part of the Bank of Mom and Dad for me!

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Darwin December 15, 2012 at 3:40 pm

True, that funded part of my college – paid my dad back over my first 5 years out of college.

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Financial Samurai December 11, 2012 at 7:25 pm

Awesome mate!

Kids are so easy to manipulate. My parents said, “Get A’s, and I’ll buy you Nerds candy,” and A’s are what I got!

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Darwin December 15, 2012 at 3:41 pm

Oh yeah, when the report cards come in, we buy them a special Lego or whatever they’re into at the time. Both the boys are making us real proud with school – I hope they keep it up!

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Againstthegrain December 13, 2012 at 4:46 pm

Years ago when my son was about 10 yoa, I read a book by Mary C. Hunt titled “Debt-Proof your Kids”, and it made a big impact on me. I had a child who was not naturally good with money, so I adapted the plan she used on her two sons for my child, and implemented it at age 12 (he’s now 14).

I looked at past expenses for him and anticipated expenses for the coming year, composed a contract between us, opened a “teen” checking account with debit card for him, and started an automatic deposit “salary” of $70 per month into his account based on the previous year’s history expenses for his clothing, shoes, and other things we spent money on for him, plus a bit more for pocket money and discretionary spending, etc. with a clear-cut list of expenses he was now responsible for for that year (clothing, toys/games/iTunes purchases, pocket money, snacks & movies with friends, etc.). Of course if we are dining out or going to the movies as a family we pay for him. I also took him to the DMV to get an real ID card (like a driver’s license) because some retailers want to see an ID with a plastic card transaction and after a while I wasn’t always with him for purchases (his charter school didn’t issue school IDs at the time).

Each year when school begins (or a birthday could be used), his “salary” goes up in proportion to our best guess-timates of his needs for the coming year and our own budget (which admittedly has tightened the past two years), but his list of expense responsibilities expands to match (this year haircuts and a birthday gift for his best friend was added to the list). We try to make his salary generous enough to include some wiggle room for mistakes and unanticipated expenses, a reasonable savings rate (with a bonus incentive for savings deposits that are left to accumulate), & rapid growth spurts (the year he moved from boy’s to men’s clothing/shoes sizes meant a big jump in clothing & shoe costs, so we made a salary adjustment mid-year, but if reasonable planning is done, more frequent adjustments aren’t needed), but not so generous that he doesn’t have to make some adjustments in his choices to economize or to save up for premium or big ticket items. The salary might seem high at first perhaps (at age 14 he’s now getting $100/mo), esp compared to what some friends might receive for pocket money, but it’s really just shifting the money we would already being spending into his control. This plan practically eliminated requests for handouts, advances, and loans (consistent policy is important, because the child needs to learn to anticipate expenses, budget accordingly, and plan ahead – or in our son’s case, simply carry a wallet, some cash, or his debit card with him). Damaging or losing the debit card is likely – so it isn’t that big of a deal as long as the bank is notified relatively quickly – they’ll suspend it temporarily (usually it is found in the car, in the washing machine, or under a heap of debris in the kid’s room) or cancel and replace it if truly lost or stolen. It’s all part of the responsibility lesson – learning more from making mistakes than from doing everything perfectly – and developing habits that facilitate one’s plans rather than hindering them.

Spending advice and assistance is given when requested, but unsolicitated advice is avoided (it’s hard sometimes – still working on that one myself). Not spending enough on clothing and shoes to be decently clothes isn’t a problem for him, but some kids are skinflints, so standards might have to be set so that they don’t live in outgrown duds or rags (he’s far picker about his clothes than I am in some ways, and turns his jeans inside out when he washes them to reduce fading – gasp!). but otherwise, he spends the money as he wishes, and believe me, he quickly realized his clothing money went much farther at Kohl’s than at the trendy skateboard shop, especially after he grew into the men’s sizes. He also saved up his birthday and Christmas money gifts from relatives last year and took time to research and then buy his own used MacBook Pro laptop from a Craigslist seller with my husband’s help this year (age 14).

Sure, he has made some wasteful and silly purchases, and will make more of these, but that’s the whole point – it’s better to learn those lessons now than later when the stakes and amounts are higher. At 14 he is now starting to mentioned driving (our state issues learner’s permits beginning at age 15 with restricted licenses possible at age 16, so I’ve told him he should start saving now to cover a big share of the anticipated auto insurance policy increase (our policy will is likely to double with a teenage male driver on it, I think). I

My goal is for him to have a pretty good idea of how to live within his means, to delay gratification on items big and small, and have a good idea of how much his “lifestyle choices” will cost before he gets out of high school. He’s come a long way, and I think that goal is largely achievable, even though he’s a kid who wants trendy, up-to-date technology gadgets and clothes.

I don’t tie his “salary” to chores, btw, though I do expect him to do chores regularly. We give him the salary because having money and the responsibility to go with it is the best way to learn how to use it, and there aren’t a lot of ways for a kid his age to earn money in our area (people hire landscaping services/gardeners to tend their lawns instead of hiring kids, etc.). If he doesn’t do his chores, there are other loss-of-privilege consequences: no desserts, no to car rides request to go places, etc. He sometimes earns a little more money by doing additional jobs in the garden or pet sitting for neighbors, too, and in a few years he’ll be old enough to get a part-time job if he can manage it and keep up with his schoolwork.

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Darwin December 15, 2012 at 3:43 pm

This is neat; looks like you’re treating him a real adult and teaching him how he’s going to have to manage his money when he’s in college and/or on his own. I learned all about it in college since my parents didn’t pay my bills but gave me a monthly amount to pay the landlord, food, utilities, etc. It worked!

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