To Teach Your Kids Money Management, Start Your Own Bank

(iStockphoto)

This week, I decided to stop complaining about the big banks and do something about it. My wife and I established our own bank. We’re calling it the Burton Bank. Our bank offers a no-fee savings account that pays 80% APY. Unsurprisingly, we already have our first customer. Her name is Iris, and she’s six years old.

I’d been bugging Iris to open a savings account ever since I started giving her an allowance. Her reaction was always the same: You want to do what with my money? Take it down the street and give it to someone else?

“But they’ll pay interest!” I sputtered. Then I had to explain that even with the kids’ teaser rate offered by our local credit union, if she deposited her life savings ($23 in coins and small bills), at the end of this month she would earn 12 cents.

Screw that, said Iris. (I’m paraphrasing.)

The Burton Bank is lifted wholesale from David Owen’s book, The First National Bank of Dad. Parents get everything about kids and money wrong, says Owen. We give them a tiny allowance and then try to control what they spend it on. The result: our kids spend money as soon as they get their hands on it, for fear that a capricious parent will confiscate it or lay down arbitrary rules.

The book got to me, because I was making pretty much every mistake in it, and Iris had responded exactly the way Owen said she would. I wondered: why are parents so controlling about money in a way we’d never be about, say, bike safety?

“I guess it’s partly our anxieties about our own behavior with money, and then out of a desire to keep our children on a short leash,” said Owen. I spoke to him last week, one banker to another. (I cannot confirm that we were wearing banker shirts and chomping cigars, but you can assume what you like.) “But the way we learn is by trying things, screwing them up, and trying them again.”

The ground rules

So I put out my cigar and called Iris in for a meeting. I told her I’d be doubling her allowance, but from now on it will be paid by direct deposit to the Burton Bank. At the end of the month, I’ll credit her a nickel for every dollar she has on deposit. She can make a deposit or withdrawal at any time and spend the money on anything she wants short of something dangerous. Like any banker, I reserve the right to charge up to six $30 overdraft fees per day and to sell her AAA-rated subprime mortgage securities.

Now, I gave Iris a 50/50 chance of zoning out before I got this far. Like most six-year-olds, she has little tolerance for personal finance conversations of any kind. But her first question was:

“If I keep all my allowance in there until I’m 13, how much will it be worth then?”

We punched some numbers into the HP calculator and came up with a rough estimate of $24,000. Iris’s eyes turned into dollar signs. “The banker reserves the right to change the interest rate at any time,” I said.

Giving saving a greed-is-good shine is part of what the Bank of Dad concept is all about. Kids experience time a lot more slowly than adults. To them, even a stock market return-like 7% APY is the same as zilch. It’s not an incentive to save—it’s an incentive to spend. (Six-year-olds would get along well with Ben Bernanke.)

Banker of five

Owen’s children are grown now, and I wanted to talk to a current banker. So I called Zack Miller. Miller, an investment expert, is the founder of Tradestreaming.com and, more to the point, father of five kids, ages 3 to 15. “They were continuously coming to us to ask for money for this and that,” he said. On top of that, there were constant arguments over whether that week’s allowance had been paid yet.

So Miller established a family bank. He pays 3% per month. “It’s been revolutionary for the 10, 13, and 15 year old,” he said. “They really get it, and it totally lowered the stress in our family.” On a recent trip to Target, his kids walked around with cash in their pockets and didn’t spend it; they were daydreaming about compound interest. “They’re forcing themselves to think: is it worth it to spend $10 on this particular item or wait?”

That was Owen’s experience, too. “Once they had enough money that they felt comfortable, so much of the tension left the entire issue.”

Miller said he’s concerned that his kids may be focusing too much on saving and not enough on spending. Wouldn’t you love to have this problem?

How to start a bank

I set up the Burton Bank in Quicken by creating a new account (not tied to a real bank account), crediting Iris’s opening deposit, and setting up an automatic deposit for her allowance. I figure I’ll have enough money on hand to handle her withdrawals for the moment. When she accumulates more than, say, $100, I’ll probably open a subaccount for her at my credit union and track it in Mint.com.

Miller uses an online service called FamZoo, which automates the family bank process for $6/month. His kids can check their own balances, create savings goals, and forecast the future value of their savings. For my one measly kid, I’m happy to implement it myself, but if I had multiple depositors, I’d consider coughing up the subscription fee.

I’m excited to see how Iris will respond to her modest increase in wealth and freedom. I’ll let you know how it’s going. My guess is that she’ll hoard her money, in which case I’ll do exactly what Ben Bernanke would do: lower her interest rate.