iStock_000018737773_ExtraSmallIt doesn’t really take kids that long to grasp the concept of money. They see you pull money out to buy things and quickly figure out that your money can buy things for them. But for the National Bank of Dad (or mom and dad, or mom, or whatever) to work, your kids must first understand the concept of a bank. To most kids, banks are where grownups store their money and where they go get their money when they need it (Owen 35).

David Owen, author of The First National Bank of Dad says that the most significant feature of the bank of dad has nothing to do with interest rates but is has to do with control (Owen 41), your kids control, not yours. Your children’s accounts must belong to them (Owen 41). When they save they reap the benefits; when they want to spend they don’t need your permission (but mom and dad still retain final authority on what is purchased to ensure that it is appropriate, in other words, you can veto your 13-year-old sons subscription to Playboy). If the money they spend is not truly theirs they have no compelling reason to pay attention to how to spend it. If they want to spend it foolishly, that’s up to them (Owen 41-42).

Believe me, its hard to watch your kid spend money on a toy you know is going to break within minutes of the purchase, but ask yourself, is it better to learn the hard lesson with five dollars when they are young, or is it better to learn a hard lesson with $50,000 when they’re older? It’s the same lesson, it’s just the cost of learning that makes the difference. After a couple of mistakes you’ll find the learning curve to be pretty steep and one thing that truly warms my heart is when I see one of my kids saying no to a purchase (foolish or otherwise) because they are trying to save money for something else. You know you’ve reached a milestone when the question your kid asks themselves is not “how can I talk to mom or dad into paying for this?” but “is this something I really want?”

Some key points to make national bank of dad work:

  • Use real money. Do not set up some sort of artificial credit card for them. Money in one’s pocket seems infinitely more real than money in someone else’s pocket and it is harder to part with actual cash that it is to slide a credit card (Owen 47). Incidentally, the credit card companies and Fifth Avenue all know this basic concept. We have seen previously in these blogs that it is much easier to spend money using a credit card than it is using actual cash which means we spend more.
  • Chores and pay for work (Owen 47-48). Owen’s disagrees with tying a child’s allowance to chores or work around the house. I do too. Children should have an allowance because they’re not yet old enough to work themselves and they need to learn the concept of money so they will move out of your house someday. Owens and I both agree that kids need to do chores because that is part of normal life for adults and for kids (Owens 49). We also both agree that tossing a few extra bucks to the kids for doing more extraordinary work, like picking up leaves during the fall or shoveling snow, something that you could actually pay somebody else to do, is okay.
  • The Goldilocks Allowance – not too much, not too little. Children need money and paying them an allowance is the best and easiest way to ensure they have it (Owens 57). Children who receive stingy allowances have no reason to think long-term and see no point in saving because they know their incomes are too meager to ever accumulate into  anything significant (Owens 59). For children to understand money, they need the opportunity to actually spend some of it. Although the allowance shouldn’t be so large as to seem unreal or inexhaustible. If they lose a weeks of allowance they should feel upset; if they find a weeks worth of allowance their first impulse should not be running out to blow it (Owens 61-62). Conventional wisdom says either a $1 for every year of their age, or fifty cents for every year of their age. We just raised ours to $1/year-old to provide some more incentives to save. It was taking quite awhile for the kids to save for their toys since they are getting a bit older and the cost of the toys goes up.
  • Do NOT require them to save part of their allowance (Owens 63). Mom and dad, you need to give them some space to exercise their free will. If you give your kid $5 a week and tell them to save $1, then they quickly figure out their allowance is only $4. You’re trying to teach them to save, not teach them socialism. Even before reading this book it did not take my kids that long to figure out that they needed to save a little bit of money week after week if they wanted to buy the big-ticket items.

Now let’s talk about interest rates. I realize that it’s too early explain the concept of compounded interest to someone in the first grade. However, you can show them how it works. We started off using a 10% interest rate. Yes, I know this is incredibly high and totally unrealistic but it makes the math much easier for them to understand (and us). Plus, we are saving for a trip to Disney World so we want to give the kids a good incentive to save for that trip. We informed them that we will not be buying them gifts at Disney, that’s what their savings is for.

As soon as your  kids understand the concept of a bank (or an ATM), then you can begin your program. We set up two envelopes. One envelope is for their savings and one is their spending account. They can take out of their spend account anytime and they can save as much or as little as they want. My wife and I did have a conversation about our youngest one, who we feared would save nothing and not have any spending money at Disney World. This could be a very hard life lesson but it will likely not be forgotten if it happens. Plus, his older siblings seem to speak his tongue and are are pretty good at explaining how this savings thing benefits him. They tend to follow each others leads.

We also told them that after Disney the interest rate would drop to something around 3-5%. While that’s still better than any bank it provides them the incentive to save and doesn’t break mom and dad’s real bank. Owens recommends letting them take their savings when they want, however, we have made an adjustment in light of the Disney effect. Initially, we are treating their savings envelope like a certificate of deposit (CD). Any money that goes in, stays in until the Disney trip. After Disney, we will likely adopt the other system where they can save as much as they want and use it as they wish, and help them to understand that the more they save the more they will earn.

Owen, David. The First National Bank of Dad: A Foolproof Method for Teaching Your Kids the Value of Money. New York: Simon & Schuster, 2003. Print.

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