Thursday, February 2, 2012

Teaching Your Kids about Money: February Edition

Investing and Growing Your Money

Teaching your Kids about Money is a comprehensive guide for teaching your child or teen about money management and financial literacy.  At the beginning of each month in 2012, I will give you more information and tips about introducing these topics in your family and will share some practical ideas for implementing these concepts into your everyday life.  For previous month's topics, click here. Our February topic is Investing and Growing Your Money.



Investing and growing money is an often overlooked area of financial literacy with kids.  We tend to view investments and money growth as something that adults should do.  We learn about our 401Ks, study the stock market and determine how to best diversify our investments.  However, when it comes to our kids, we often just hand them their allowance or pay them for odd jobs around the house. 


Many parents, in an effort to teach about investments and to prevent wasting money, open their child a savings account.  Parents have the kids deposit any monetary gifts or a specific portion of their allowance.  And, they get to earn interest so it’s a win-win situation, right?  David Owen, in his book “The First National Bank of Dad”, has a different point of view.  He says that a child’s perception of a savings account is like “a black hole that swallows birthday checks.”  Here’s a wonderful excerpt from his book…

Kid: “Grandma gave me twenty-five dollars!”
Parent: “How nice. We’ll put that check straight into your savings account.”
Kid: “But she gave it to me! I want it!”
Parent: “Oh, it will still be yours. You just have to keep it in the bank so that it can grow.”
Kid (suspicious): “What do you mean ‘grow’?”
Parent: “Well, if you leave your twenty-five dollars in the bank for just one year, the bank will pay you fifty cents. And if you leave all of that in the bank for just one more year, the bank will give you another fifty cents, plus an extra penny besides. That’s called compound interest. It will help you go to college.”

 The main problem with these schemes is that there’s nothing in them for the kids. College seems a thousand years away to young children—who, at this point, probably think they’d just as soon stay home, anyway—and the promised annual return wouldn’t cover even the cost of a pack of chewing gum. Most children immediately realize that banking plans implemented by their parents are actually punitive in intent: their true purpose is not to promote saving but to prevent consumption. Appalled by what their children spend on candy and video games—and also appalled, perhaps, by the degree to which their children’s profligacy seems to mimic their own—the parents devise stratagems for impounding excess resources. Owen, David (2007-04-24). First National Bank of Dad, The (pp. 4-5). Simon & Schuster. Kindle Edition.
Savings accounts and college accounts definitely serve a purpose --- to save for long term goals.  I think it is a great idea to save for college and encourage all families to have long term plans.  However, the concept of college to an 8 year old is too far removed from their everyday life to be meaningful.  If our goal is to teach kids how to invest and grow their money, there are other opportunities that can get the kids actively involved in their investing.

Interest from Parents:
Parents can pay interest on the amount of money their child has in savings at the end of each month.  This is the core concept in David Owen’s First National Bank of Dad.  He simply used his Quicken program and added a “virtual account” for each of his kids.  They could deposit their allowance or earnings into the Bank of Dad account.  At the end of each month, he would add 5% interest to the amount in each account.  He made the interest level high enough that it was enticing for his kids.  They began to choose to save instead of choosing to spend.  His approach engaged his kids in money management and made it meaningful to them.

Making this work for you:  This is a highly flexible approach.  You can determine the interest rate and the frequency of interest payments.  Some families like to adopt an Annual Percentage Yield approach similar to the real banking industry.  You can decide to include allowance payments or just pay interest on other money that the kids have earned.  Keeping track of the balances and interest can be done with a simple ledger, a spreadsheet, a program like Quicken or a virtual family bank, like MoneyTrail.

Investing in Themselves:
This encourages a true entrepreneurial spirit.  It seems that every kid wants to do a lemonade stand at some point.  As they get older, encourage them to think beyond the lemonade stand.  Do they have a particular talent or skill that they could use to make money?  Enable them to use their own money to invest in their business.  Help them develop a modified business plan and determine how much they will need to charge for their product or service to make a return on their investment. Your kids might gain money with their business or they might lose money.  Either way, they will be learning a valuable lesson about investing in themselves.

Making this work for you:    Biz at Bedtime has an excellent, free basic business plan template for kids. Sit down with them one evening, talk about some business ideas and help them work through the template to start their plan. 

Investing in Outside Opportunities:
As kids get older and get into their teen years, investing in the stock market becomes a realistic opportunity for them.  You can help them learn about the stock market, pick a few companies that they feel are promising and help them buy a few stocks.  The teens can follow the stock’s performance and hopefully, grow their money.  

Making this work for you: Introducing the stock market to a teen can be a very involved process.  Fortunately there are many resources available to teach them about the stock market before they buy the stock.  Check out my post, Using the Stock Market to Teach Teens about Investing.

The March Edition of Teaching Your Kids about Money will cover saving for short term goals.  Subscribe by email or RSS feed at the top of this page so that you don't miss it!

19 comments:

  1. This is a great idea. I always love to read thoughts on educating kids. I do a Grandma money camp in the summer for my grandkids to try to help teach them financial literacy concepts.

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  2. Thanks, Marie. Grandma money camp? I LOVE the concept. Have you blogged about it? I would so enjoy reading about what you do with your grandkids. Feel free to put up a link to a blog post about money camp.

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    1. Thanks Pam. I did blog about it - several times. Here is a link to the first post and if you are interested, you can follow the trail from there with other links in each post.
      http://blog.familymoneyvalues.com/2011/04/grandmas-money-camp-teaching.html

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    2. Thanks for sharing your link, Marie. I am going to check it out right now!

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  3. These are excellent points. We have a 16 year old who owns Apple stock and has a bank account with a substantial savings. We were just about to open a Roth IRA for him but are learning that this could hurt him in qualifying for financial aid in college. It doesn't make sense to be penalized for being personally responsible!

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    1. First of all, kudos to your son for having stock and a nice savings account. What a great "heads up" he has on tackling the world of financial investments.

      Our oldest child will start college this fall and we have recently been going through the FASFA application process. Here is a great article that covers the basics of Roth IRA's and their relationship with financial aide.

      http://www.bankrate.com/finance/college-finance/roth-conversion-may-impact-financial-aid-1.aspx

      Lynn O'Shaughnessy also writes great material about college topics and frequently covers financial aid topics. http://www.thecollegesolution.com/

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    2. That's very kind of you. Will check out the article.

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  4. Keyuri, I asked finance guru Dan Kadlec about your Roth IRA concern for your 16yo. His response: "only if the student takes a distribution to pay tuition. otherwise no impact http://www.finaid.org/savings/retirementplans.phtml "

    See https://twitter.com/#!/FamZoo/status/165123060637253632

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    1. Thanks Bill. That is good to know. There is so much information out there that it gets muddled! I recently heard that 529 plans should not be in a student or parent's name so that it cannot be considered as part of the family's wealth subsequently making it easier to qualify for aid.
      Will check out that article as well.
      THanks again.

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  5. Interesting stuff - but I can see an older child bankrupting her parents with 5% monthly interest. Perhaps you'd have set interest rates like the Fed?

    I'm currently childless, but I like the idea of getting my children into stocks as early as possible. My father set up a 'virtual account' for me... which entailed paper and the Wall Street Journal. Even then I was into AAPL, I recall...

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    1. The reason he set the interest rate so high was to entice the kids to save and to give immediate feedback. Of course, the kids were also allowed to spend their money so it was up to them to determine the amount that they chose to leave in their account each month. However, you raise a good point. Parents need to make sure that the money program they use with their child fits into the overall family budget. You shouldn't give your child $10 a week or 5% a month just because that is what their friends get. Choose the program and the amounts that fit your family.

      How old were you when you started with virtual stock markets? I haven't done any of this with my kids but am getting very interested in trying out some of the great resources available.

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    2. Hmm... I wish I could tell you exactly, but I was certainly in the single digits. At that point I was already pretty number-interested... and, in retrospect, an online virtual stock account would have been awesome.

      At this point? Transaction fees have come down quite a bit from when I had my fake account - we're almost to the point of real stock accounts, haha.

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  6. Great ideas! I like the idea of encouraging kids to save by paying interest on their money.

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    1. I think the key is finding what motivates your child so that they make their own decisions. Easier said than done, right?

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  7. Lots of great stuff to consider. :-) My daughter has had a saving account and a CD since she was little. She enjoys putting money into them and seeing how much interest she earns.

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    1. Cool! I'll bet that encourages lots of great conversations!

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  8. It is so much easier to make this sort of thing interactive for kids these days. being able to log into an account and check a balance, or watch stocks in real time. I really like these savings tips, but loved the entrepreneurial one even more. Lemonade stands are out, thinking outside the square is far more important.

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    1. When one of my sons was in the 4th grade, they participated in a business fair at school. He and his partner created a new cookie, called "The Smookie". It was a smore type cookie --- two graham crackers, marshmallow fluff in the middle and the whole thing dipped in chocolate. They priced them at 75 cents a piece. They got a few complaints (from parents mainly) that the cookies were over priced, but they sold out and made a $15 profit. Great lesson for business, supply & demand, marketing, etc.!

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  9. A very good one Pam. I will sure start off my bank. My kids have been saving (supervised by me of course) and have been itching to have their fingers on their savings ever since. I believe this will motivate them to keep saving. Thank you so much

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