Kids and Money – Is the Money Really Theirs?

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 thinking—even 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.

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11 thoughts on “Kids and Money – Is the Money Really Theirs?”

  1. Wow, this part really struck home for me as a potential reason why kids want to go spend the money right away: “fear of mom and dad snatching it away from them and stashing it in some bank account where it couldn’t be touched.”

    I never thought of how putting money in a bank account might seem like it disappearing into a black hole to a kid.

  2. I like the idea, but doing that with the kids birthday money is kinda sad.

    I’m sure the person giving the money to the child actually wanted the child to go buy themselves a toy or whatnot, not save it. Money is to be spent!

    Saving for a goal is one thing. Saving just for ‘savings sake’ is not really teaching anything (except for a love of money).

    Then again, my opinions usually are different from most. I learned all I needed to know about money when I started earning it at age 13 in some of the roughest, toughest jobs around (Mike Rowe would be proud).

  3. Bluntmoney,

    I know…it realy hit home with me too.


    I see nothing wrong with saving money for the sake of saving money. None of us can predict the future so it never hurts to have some cash available for any needs that might pop up.

  4. Sounds like he is setting his kids up for disaster as they might make really risky investments later in life that will cost them as they continue to expect and chase those 80% returns. If you want to start a Ponzi scheme, find these kids.

  5. JLP: For adults, saving to have an emergency fund (the goal) is a great thing. But once that goal is funded, you should have another goal for additional savings. I try to mentally spend (or direct) all my money before I earn it, through various savings goals (even retirement savings should be goal based).

    There is a company that really takes the ‘goal-based savings’ to a whole new level:

    I haven’t opened an account there, but that might be a great site to use to teach kids about savings (and have relatives contribute towards goals with birthday money, etc).

  6. My dad would match dollar for dollar any money we put in his safe. Stipulation, 1) money had to be in the safe for one year. 2) any purchases made were first discussed. I rememeber buying the PSX with my hard earned money as my first big purchase. Through highschool I was able to save $4500 and my dad was nice enough to double it.

  7. I always had to save half of anything I got. When I was younger and did odd jobs for extra cash, half of it went into the bank. When I got birthday presents or cash from a holiday, half went into the bank. When I still lived at home and started working a real job in high school, half what was left after bills always went into the bank. This has helped me tremendously in my life. This is something I plan on passing on to my kids when I have some.

    I never thought my money was being taken from me and I never was upset over not getting all of my money. The few times I asked my mother to let me have all of it, she would discuss it with me and I would always understand that the money (and I) would be best served if it sat in my account.

  8. He better hope his kids are too stupid to actually take him up on that 80% APY offer or very quickly he will owe them more than his salary. 🙂

  9. Good post. The best way to learn is by doing, so let kids handle their own money. By all means, offer advice and suggestions and be helpful, but let them figure out how it all works too.

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