Author Topic: First National Bank of Mom & Dad  (Read 3840 times)

CheapskateWife

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First National Bank of Mom & Dad
« on: May 21, 2015, 11:00:28 AM »
After reading the blog post yesterday, I stole the idea for managing the kid's money and teaching him about the art of not spending.  He is already a good little saver, but at 6 really doesn't understand the whole concept of a bank or investments; so the scenario MMM shared where he and Mrs.MM are the bank seemed like a great way to introduce the idea of compounding interest.

First we counted up everything in his piggybank and then I explained to him that I would pay him 10% interest for the use of his allowance and savings.  I showed him a few scenarios on the Excel spreadsheet that included allowance deposits, toy purchase withdrawls, and interest payments and the little guy lit up!  So there is a special place on my computer's desktop where he can open the file and check on his balance with FNBMD.

Is anyone else already doing this?  Care to share your experiences?
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FoundPeace

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Re: First National Bank of Mom & Dad
« Reply #1 on: May 21, 2015, 11:46:56 AM »
My parents actually did something similar for me as a kid. My parent's have a mortgage and so any money I gave them would earn the interest that they would have had to pay the bank. As I was a natural saver as a kid, this seemed like the best option. However, this lead to me being nervous about knowing what to do with my money when I moved out. But I think this is a great idea. My mom is an accountant so she gave me a yearly statement and stuff printed off of quicken. I plan on doing something similar with my kids when they are older.

CheapskateWife

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Re: First National Bank of Mom & Dad
« Reply #2 on: May 21, 2015, 11:53:46 AM »
So did your mom hold the money until you moved out?

I had hoped this would be an introductory lesson, and that in a few years we would transition to some more "real-world" investments like CD's and perhaps even some Vanguard investing.  I feel like the FNBMB model is a great starting place, but after about age 10, its time to move on to the real financial market.
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RyanAtTanagra

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Re: First National Bank of Mom & Dad
« Reply #3 on: May 21, 2015, 03:25:00 PM »
I was curious about this part.  I understand wanting to get the point of interest across, but 10% threw me off.  What happens when the 10% interest bearing bank of mom&dad eventually shuts down and you're stuck with normal bank interest rates or the more volatile options that will still be lucky to return that amount?  It will seem like a pay cut and make saving seem less impressive.  If you believe 4% to be fair SWR, why not stick with that, or at most 7% to teach the concept of leaving 3% behind for inflation?  Has anyone done something like 10% and then taken it away?  What kind of effect did it have on savings rates?

GardenFun

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Re: First National Bank of Mom & Dad
« Reply #4 on: May 21, 2015, 06:57:08 PM »
Depending on the amount in the account, look at opening a Vanguard target date fund.  While these types of funds have roughly a 0.25% expense ratio, they can be opened with $1,000.  Some T. Rowe price accounts can be opened with $500.  Keep the account in the parent's name but identify the money for each child. 

Until there is enough money to open an account, the bank of mom and dad idea is a nice idea.  But there comes a point where the child needs to feel the real-world effect of investing - and benefit from having a parent around to guide them through the emotional feelings associated with gains and losses.   

Prairie Gal

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Re: First National Bank of Mom & Dad
« Reply #5 on: May 21, 2015, 08:52:47 PM »
I don't see why you don't just open a savings account for you child?

Just another comment on this blog post. Paying your kids for walking seems really, really dumb to me. Reminds me of the parents that used to pay their kids for goals when my kids played hockey.

velocistar237

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Re: First National Bank of Mom & Dad
« Reply #6 on: May 22, 2015, 08:56:51 AM »
I like MMM's idea of holding onto a child's money because when FAFSA time comes, any assets owned by the child will count against financial aid at a higher percentage than if the assets were held by a parent. Wait until that's all done with, then transfer the money. This only becomes a problem if the amount is so large that it causes tax issues.

10% threw me off.

How about 8% instead? Pick a long term market average or something like that.

Mississippi Mudstache

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Re: First National Bank of Mom & Dad
« Reply #7 on: May 22, 2015, 09:33:53 AM »
I like MMM's idea of holding onto a child's money because when FAFSA time comes, any assets owned by the child will count against financial aid at a higher percentage than if the assets were held by a parent. Wait until that's all done with, then transfer the money. This only becomes a problem if the amount is so large that it causes tax issues.

10% threw me off.

How about 8% instead? Pick a long term market average or something like that.

I think 10% is reasonable for demonstrating the principles of compound interest at a young age. And that's what it's about, really - just demonstrating the principles. The kids can be transitioned to more realistic investing options as they get older. Heck, I remember getting damn near 10% interest in my savings account as a kid in the '80s. Didn't stop me from saving when rates dropped to 6%, then 4%, and now 1%. I learned what I needed to learn (and of course I invest mostly in securities, not savings accounts, these days).
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partgypsy

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Re: First National Bank of Mom & Dad
« Reply #8 on: May 22, 2015, 10:10:15 AM »
I can understand the idea of wanting to show the benefit of compound interest. Don't know what the right way to teach money skills.

What we do, is that kids have their allowance automatically put in their savings accounts. They get this allowance for basic, assumed they will do things like picking up after themselves, keeping room clean, very small chores. They also can get additional money for extra chores. Daughter at 12 also babysits and is paid in cash.
The deal is if they want to put any money in their college savings account, I will match that amount. As it is in a fund, they can visibly see that the money grow (the amount is larger than the amount deposited).

If they want to buy extra stuff for themselves that are non essentials (if in a store, etc) they can spend their money. Sometimes they will go ahead and buy it, and they can take it out of their piggy bank or I will take out of their savings. Most of the time it is interesting something that they REALLY wanted, once they are told they can buy with own money, suddenly become disinterested.
So I think they are learning some money lessons, though I don't know if this is the optimal way of doing it.
One thing we need to work on, is introducing more expected chores as part of their allowance. We have been easy on them, but they need to contribute more to the household in this fashion, in a non-negotiable way.

CheapskateWife

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Re: First National Bank of Mom & Dad
« Reply #9 on: May 22, 2015, 10:19:32 AM »
Our 6 yr old has a chore chart that we plan to add additional responsibilities to as the years go on.  Chores for him include feeding and watering dogs, feeding fish, preparing his school lunches, cleaning his room, collecting the household trash, etc.

I'm thinking that once we get to the $1000 threshold in the FNBMD, that transitioning to an investment platform, like a UGMA account or even a taxable Vanguard might be the way to get him interested in investing in the market.  We might also try that time honored tradition of investing in a share or two of some company he can relate to (like Walmart or Amazon) and he can watch how those shares are impacted by market pressures.  But that won't likely be until he is 10-12.
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FoundPeace

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Re: First National Bank of Mom & Dad
« Reply #10 on: May 22, 2015, 10:26:58 AM »
So did your mom hold the money until you moved out?

I had hoped this would be an introductory lesson, and that in a few years we would transition to some more "real-world" investments like CD's and perhaps even some Vanguard investing.  I feel like the FNBMB model is a great starting place, but after about age 10, its time to move on to the real financial market.

Yes, she just held my money until I moved out. She had no idea what to do about investing, but she did know about saving and compound interest. As I've learned about investing I've been passing on some of my knowledge to her, so this year she finally moved my parent's investments over to Vanguard from Edward Jones. I hope to be able to educate my kids in saving and investing.

RyanAtTanagra

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Re: First National Bank of Mom & Dad
« Reply #11 on: May 22, 2015, 10:30:53 AM »
I don't see why you don't just open a savings account for you child?

Well I think the idea isn't just to encourage savings, but to get the point of across of your money working for you and making more money, which doesn't really work at <1% returns.  I'm just not sure if using a higher-than-realistic number is a good idea either.  If I have $1000 invested in the bank of mom&dad and am getting a cool $100/yr in free money, then all of a sudden mom&dad says it's time to move the money into a real account that returns 1% (if savings), or 4% SWR in stocks, that's going to be disappointing.

CheapskateWife

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Re: First National Bank of Mom & Dad
« Reply #12 on: May 22, 2015, 11:41:49 AM »
Granted, the 10% rate of return is steep, but perhaps with some well placed warnings, the transition to the real market might not be so rough.

When I was a kid, savings account rates were 8-10, now they are at .08.  I'm still doing OK emotionally :)

The real lesson is that your money doesn't work for you if its sitting in a mason jar by your bed.
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FrozenBits

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Re: First National Bank of Mom & Dad
« Reply #13 on: May 22, 2015, 11:55:52 AM »
I don't see the 10% number being too steep.  The average stock market return before inflation since 1928 is around 9.6% so it seems like a good number to me.

I won't have kids for a while but I am planning on doing something similar to this when the time comes.

Iconoclast

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Re: First National Bank of Mom & Dad
« Reply #14 on: May 22, 2015, 12:35:09 PM »
I think it's a great idea to show my kids something about saving and making your dollars/euros work for you. More than when I'd open a savings or investment account (which pays out dividends once or twice a year), we will do that in a couple of years anyhow.

In the mean time, the recently opened Banco di Papa in our household will be in business...

CheapskateWife

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Re: First National Bank of Mom & Dad
« Reply #15 on: May 22, 2015, 12:56:33 PM »
So did your mom hold the money until you moved out?

I had hoped this would be an introductory lesson, and that in a few years we would transition to some more "real-world" investments like CD's and perhaps even some Vanguard investing.  I feel like the FNBMB model is a great starting place, but after about age 10, its time to move on to the real financial market.

Yes, she just held my money until I moved out. She had no idea what to do about investing, but she did know about saving and compound interest. As I've learned about investing I've been passing on some of my knowledge to her, so this year she finally moved my parent's investments over to Vanguard from Edward Jones. I hope to be able to educate my kids in saving and investing.

Thank you so much for sharing this...I see the same situation playing out with my bonus/stepkids...where they have a whole bunch of money saved up in the bank of GG and g-daddy, but they are not permitted to access it unless for an approved purchase (like gifts for their mother ...eyeroll). 

I am acutely aware that money is an aspect of their lives that is drastically controlled by the "grownups" and the 18yr old still doesn't have a bank account of his own.  I went ahead and set him up a no-fee account so he would have something with just his name on it to develop a little autonomy but know that if his maternal unit finds out about it she will likely flip.

For my part and my kids, I'll do the best I can to cultivate that love of compounding interest and making sure they call the shots with their own money (and get to live with the consequences). 
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