Author Topic: Teaching Kids Compounding and then investing question  (Read 555 times)

Heroes821

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Teaching Kids Compounding and then investing question
« on: March 15, 2017, 02:35:23 PM »
So I recently started the "bank of dad" science project where my step-children (7 and 4) each get a penny on day 1 and then another penny on day 2, 2 more pennies on day 3, etc.  This will continue until around $40-50 bucks because doing it for 30 days would result in more money than I could give them haha.

Anyway my plan after this is then let them pick some index fund at vanguard and then they can watch this money grow over time.  I've seen several threads in regards to keeping track of kids money in taxable accounts, but I was wondering if I should do that or just open up those 529 plans I've been delaying opening?  Then the 529 will let them see their growth outside of just this experiment.  They also have a few hundred in Savings accounts that could get moved to the investment accounts/529s if need be.

iowajes

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Re: Teaching Kids Compounding and then investing question
« Reply #1 on: March 15, 2017, 07:50:48 PM »
I've found the interest growth in my vanguard accounts to be painfully slow (we have only about $100K in there, but most growth seems to be from deposits), so that might be too slow for a kid to really appreciate.

I think bank of Dad is probably more generous.

Heroes821

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Re: Teaching Kids Compounding and then investing question
« Reply #2 on: March 16, 2017, 06:09:07 AM »
Thanks for the reply,  yeah the bank of dad is just to do the age old if you start with a penny and double it everyday you have a million dollars in a month thing to introduce the idea that leaving your money ALONE is better than spending all of it.   

I just hate the idea of leaving money in a savings account for them. I mean even for the 4 year old he's got a head start on compounding. My question was do I just shove it in taxable or open up 529s so the account is separate from my taxable money in vanguard? 

iowajes

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Re: Teaching Kids Compounding and then investing question
« Reply #3 on: March 16, 2017, 06:17:21 AM »
Thanks for the reply,  yeah the bank of dad is just to do the age old if you start with a penny and double it everyday you have a million dollars in a month thing to introduce the idea that leaving your money ALONE is better than spending all of it.   

I just hate the idea of leaving money in a savings account for them. I mean even for the 4 year old he's got a head start on compounding. My question was do I just shove it in taxable or open up 529s so the account is separate from my taxable money in vanguard?

We are going to put our daughter's college money in taxable accounts.  I'm not sold on the 529 (we do get a state tax advantage for it, but since I'm not quite to the max on the 403b, it would actually make more sense to max that one before taking a deduction from the 529, which has higher fees). I just don't think college funding is sustainable the way it is right now, and so saving with today's system for years down the road doesn't really make sense to me.  But your kids are slightly older than mine is (who is negative 11 days or so). 

What about an online checking account that earns some interest? The one worry I'd have with a taxable account for a child is, if it is more of a short term savings- are they willing to shoulder a loss?  When I think about my money obsessed nephews (now 6, but have been this way since 3), that would NOT have been okay. They love to save and see the money grow.  Can the bank of Dad guarantee the deposits in the event of a drop?
« Last Edit: March 16, 2017, 06:44:55 AM by iowajes »

caracarn

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Re: Teaching Kids Compounding and then investing question
« Reply #4 on: March 16, 2017, 06:23:23 AM »
I agree with iowajes, but maybe you are talking about different things.

I refer, and did with my kids, the process defined in a book "First National Bank of Dad".  Pennies are too small.  We gave them $5 per week and paid them 5% interest PER MONTH (yes a 60% annual rate).  All money was theirs, sat down with them each month and showed them what they had and what their interest was.  The book very clearly says you need to make it meaningful to the child and teach them spending not just compunding.  They can buy whatever they want except for things you deem dangerous and unacceptable (read weapons and drugs).  Other than that when they want to buy something you shut your parental mouth about if it is worth it and only ask "Do you have enough money in your bank account?"  If they do you buy it.  If it breaks 5 seconds later they start to learn.  It was amazingly effective.  You only convert them to stocks at about age 12 (not 7 or 4) when they can wrap their head around it and you still do not invest in anything real, you take whatever they want to buy, divide by 100, and track in a spreadsheet or something.  You use the real prices etc. and they learn that side, but again you give them meaningful amounts that they  can appreciate.

I've had kids who accumulated $1,000 over a few years that way and that I was paying $50 in monthly interest to, and I had others who were spendypants for a long time and barely got any, but it worked very well.  Started them all at age 3 (basically when they start asking "Can I have?" it's time to start) and now at ages 19,16 and 14 they all have a solid grasp on money, much more so than their peers who think its magically printed by fairies under their bed.  My 16 year old who has only been working at McDonald's since August, already has $4,000 saved from that.  I'm happy with the results (though I agree we converted our son to stocks at age 10 instead of 12, becuase he was milking the interest and $50-$75 in interest a month was getting really hard on dear old Dad.
« Last Edit: March 16, 2017, 06:26:28 AM by caracarn »

MightyAl

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Re: Teaching Kids Compounding and then investing question
« Reply #5 on: March 16, 2017, 07:03:12 AM »
I agree with iowajes, but maybe you are talking about different things.

I refer, and did with my kids, the process defined in a book "First National Bank of Dad".  Pennies are too small.  We gave them $5 per week and paid them 5% interest PER MONTH (yes a 60% annual rate).  All money was theirs, sat down with them each month and showed them what they had and what their interest was.  The book very clearly says you need to make it meaningful to the child and teach them spending not just compunding.  They can buy whatever they want except for things you deem dangerous and unacceptable (read weapons and drugs).  Other than that when they want to buy something you shut your parental mouth about if it is worth it and only ask "Do you have enough money in your bank account?"  If they do you buy it.  If it breaks 5 seconds later they start to learn.

I have just started talking about this with my 9 y/o after she went into debt for a tablet that she is just finally getting out from under.  I like this idea of paying 5% interest and think I will start right now.  My 5 y/o saves diligently and my 9 y/o is a spendypants.  When the older one sees the younger one getting a huge bonus every month I think she will come around.  The older one has already tried to get money out of the younger one just to cover her bills.

Heroes821

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Re: Teaching Kids Compounding and then investing question
« Reply #6 on: March 16, 2017, 07:57:55 AM »
I agree with iowajes, but maybe you are talking about different things.

I refer, and did with my kids, the process defined in a book "First National Bank of Dad".  Pennies are too small.  We gave them $5 per week and paid them 5% interest PER MONTH (yes a 60% annual rate).  All money was theirs, sat down with them each month and showed them what they had and what their interest was.  The book very clearly says you need to make it meaningful to the child and teach them spending not just compunding.  They can buy whatever they want except for things you deem dangerous and unacceptable (read weapons and drugs).  Other than that when they want to buy something you shut your parental mouth about if it is worth it and only ask "Do you have enough money in your bank account?"  If they do you buy it.  If it breaks 5 seconds later they start to learn.  It was amazingly effective.  You only convert them to stocks at about age 12 (not 7 or 4) when they can wrap their head around it and you still do not invest in anything real, you take whatever they want to buy, divide by 100, and track in a spreadsheet or something.  You use the real prices etc. and they learn that side, but again you give them meaningful amounts that they  can appreciate.

I've had kids who accumulated $1,000 over a few years that way and that I was paying $50 in monthly interest to, and I had others who were spendypants for a long time and barely got any, but it worked very well.  Started them all at age 3 (basically when they start asking "Can I have?" it's time to start) and now at ages 19,16 and 14 they all have a solid grasp on money, much more so than their peers who think its magically printed by fairies under their bed.  My 16 year old who has only been working at McDonald's since August, already has $4,000 saved from that.  I'm happy with the results (though I agree we converted our son to stocks at age 10 instead of 12, becuase he was milking the interest and $50-$75 in interest a month was getting really hard on dear old Dad.

That is a really good idea.  I don't think I can pay that kind of interest anytime soon myself, but good for down the road. 

caracarn

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Re: Teaching Kids Compounding and then investing question
« Reply #7 on: March 16, 2017, 10:11:23 AM »
I agree with iowajes, but maybe you are talking about different things.

I refer, and did with my kids, the process defined in a book "First National Bank of Dad".  Pennies are too small.  We gave them $5 per week and paid them 5% interest PER MONTH (yes a 60% annual rate).  All money was theirs, sat down with them each month and showed them what they had and what their interest was.  The book very clearly says you need to make it meaningful to the child and teach them spending not just compunding.  They can buy whatever they want except for things you deem dangerous and unacceptable (read weapons and drugs).  Other than that when they want to buy something you shut your parental mouth about if it is worth it and only ask "Do you have enough money in your bank account?"  If they do you buy it.  If it breaks 5 seconds later they start to learn.  It was amazingly effective.  You only convert them to stocks at about age 12 (not 7 or 4) when they can wrap their head around it and you still do not invest in anything real, you take whatever they want to buy, divide by 100, and track in a spreadsheet or something.  You use the real prices etc. and they learn that side, but again you give them meaningful amounts that they  can appreciate.

I've had kids who accumulated $1,000 over a few years that way and that I was paying $50 in monthly interest to, and I had others who were spendypants for a long time and barely got any, but it worked very well.  Started them all at age 3 (basically when they start asking "Can I have?" it's time to start) and now at ages 19,16 and 14 they all have a solid grasp on money, much more so than their peers who think its magically printed by fairies under their bed.  My 16 year old who has only been working at McDonald's since August, already has $4,000 saved from that.  I'm happy with the results (though I agree we converted our son to stocks at age 10 instead of 12, becuase he was milking the interest and $50-$75 in interest a month was getting really hard on dear old Dad.

That is a really good idea.  I don't think I can pay that kind of interest anytime soon myself, but good for down the road.

Over the years I have explained it to about a dozen coworkers when they asked how to teach their kids about money and stop the "I wants".  In 100% of the cases the feedback after doing it for a couple weeks was that it was the greatest thing they've ever done.  It is inredibly effective.  You can certainly lower the amounts a bit, but the key is make it meaningful so that when you sit down with your children they can see progress, so even if you gave them $1 a week and then at the end of the month they spent nothing, they would see that you magically got another $0.20 due to interest.  It does help that they have enough to actually purchase something fairly quickly or they lose interest and therefore the lesson is lost as well.  If they need to wait three months to get any real money, I do not feel that would work.

You indicated you'd be at $50 at the end of a month.  It would seem you could do this for two kids at the $5 I mention.  I say this because what typically happens for the first 6 months is they are learning to control their spending so in most cases they spend as fast as it goes in, so there is nothing to pay interest on.