It’s a common problem. Kids get a birthday card with a check and the first thing they want to do is cash it and immediately go spend it. Why do kids do this? David Owen, author of The First National Bank of Dad*, thinks the reason is because kids typically have no concept of saving and therefore can’t understand or see the benefits of saving money. In other words, there’s no incentive for them to save. The interest that a bank savings account pays is so small that kids simply can’t see their money grow and therefore can’t see the value of saving their money.
So, the author decided to set up his own bank for his two kids. In order to inspire them to save, he decided to pay them 5% per month on their money and he kept track of their accounts using Quicken. To get an idea of how generous that is, a $100 deposited in the First National Bank of Dad would grow to nearly $180 in one year. That’s an 80% annual rate of return.
His goal as a parent was to teach his kids financial responsibility and his theory was that IF he gave his kids an incentive to save, that they would save on their own with no prompting. According to the author, his plan worked. His kids didn’t feel the pressure to spend money haphazzardly for fear of mom and dad snatching it away from them and stashing it in some bank account where it couldn’t be touched.
He also took a very hands-off approach with how his kids spent their money. His belief was that kids have to learn the consequences of their actions and the only way they can do that is to feel 100% ownership of their money. Enough mistakes with their money and they will eventually learn. It’s a bit of a leap of faith but I agree with the author. If kids are constantly being told what they can and can’t do with their money (I have been guilty of this a time or two), they will never consider it theirs.
I think this is very wise thinkingeven if it means that kids make some mistakes. Most likely it’s better to learn from their mistakes when they are young than to have learn when they older and the stakes are much higher. Therefore, I’m going to take a more hands-off approach with my kids.
There are several other interesting ideas I read in the book that I’m going to cover in separate posts. I think this will be a fun series of posts.