Do you remember the very first advertisement that pressed your “want” button. Was it a toy? A game? A plush toy? Do you remember how old you were when that happened? If yes, now you remember when your attitude towards money was first formulating! Do you remember how your allowance scheme worked with your parents? How you made your very first dollar working for someone else? More moments in the formulation of your attitudes towards money!

In my lecturing, I have often stated that attitudes towards money are formulated by the mid-teens. Academic social scientists have declared me wrong! That age is …ten! If you are now on the other side of that child equation – you are the parent – you need to think early and fast about how you may mold, or contribute to, your children’s attitude towards money. And when I say the word “money”, I also mean the word “spending”, because the two are inextricably linked. My long-term favourite book on the spending side is The Millionaire Next Door, written by Stanley and Danko, PhDs. I believe this is an essential read for everybody, and should be assigned in Senior High. I personally have given away hundreds of copies over the years. The problem is that it’s a bit of a tough read for a 10 year-old! So the burden is back on Mom and Dad.

A lot of life’s progression is determined for many of us by just fumbling along. A life-time is a long time and there seems plenty of opportunity to make mistakes and make up for them later. But not with this! Zero to ten will go by in a flash! And then…it’s too late! So parents need to be more proactive in having a strategy.

And so I introduce an interesting collection of ideas from a journalist with The New Yorker magazine, David Owen, in his book The First National Bank of Dad. He first sets the stage with some observations, then he proposes a wild and interesting idea – the Bank of Dad, a financial institution destined to lose money!

He opines that, “To a kid, a savings account is just a black hole that swallows birthday cheques… they perceive that parentally-enforced money restrictions are not intended to promote saving but rather to curtail consumption.” Parents expect their children to behave with their money with mature sobriety, often even more so than do some parents themselves!

“Long term” to a five year old does not have the same association as it does for a parent. In Owen’s estimation, a fair metric of long term for a small child is probably a month. “To be attractive to a child, saving has to make life better for the child- and the benefits have to be tangible.” At current interest rates in regular financial institutions, the interest earned on $100 in a year might be enough to buy a chocolate bar. This is insufficient to learn the rewards of saving and deferred gratification.

Instead, The National Bank of Dad would take in deposits from his young children and pay them – are you ready – 5% PER MONTH! Compounded, that comes to 70% per annum. This turned them into instant accumulators of wealth! As soon as they could see their saving was generating a meaningful reward, frenzied spending and instant gratification were less interesting.

Owen’s bank also functioned like a regular bank, where withdrawals could be made. He left withdrawable cash in a special place in the house, and the children could draw on it on a honour system and have their “account” debited.

Over time, as money accumulated and wants developed, the young children also learned valuable lessons about “buying well” – getting value for money….. not buying based upon infatuation of the moment. These traits aren’t so easily learned spending “other people’s money”! The philosophical issue at hand is that of control – children need to experience – really experience within the limited confines of youth – the importance of the feedback loop of spending and of saving. They need the opportunity to make wise and foolish decisions in order to hone their decision-making skills. The principle is the same as it is in business…..responsibility needs to come hand-in-hand with authority… and vice versa.

Over time however, Owen discovered that he had seeded too much success! The children’s savings were growing significantly, particularly after they were old enough to make some outside pocket money to invest. The 5% per month compounding rate was starting to take its toll! So, he “renegotiated” the rate to 3% (just as your bank recently did with the interest rate paid on your saving account!). This system carried on for six years until the children entered teen-hood, at which time another clever scheme kicked in and the Bank of Dad closed its doors.

As the children entered teen-hood, other grown-up lessons needed to be experienced. And they needed to be weaned off 36% rates of return at the Bank! So, Owen graduated from banking to a stock exchange. He became the brokerage and clearing house for his children to undertake real, albeit simulated, stock investing. In essence, he became the other side of the transaction in all of their trades. He had a simple idea to tie it to the real world yet make it do-able: all of the real stock prices were divided by 100! In other words, the share that traded on the real market at $80 will trade at the Dad Exchange for 80 cents. The account also functioned like a real one because low rates of interest (no longer 3% per month) were paid on cash balances, phantom dividends were credited and any bond or mutual fund could be bought. He started the process by seeding their accounts with approximately $250 spread across six blue chip stocks. After that…. it was into the deep end! The author was largely hands-off in the area of investing advice, choosing instead that the children learned themselves.

It is not likely to see your 15 year old sign up for an on-line University course in finance, but there are other ways to advance their experiences. For instance, you might prevail upon your investment advisor to donate a half-hour to them. It’s also a good time to dust off the old globe you bought for them years ago and spin it around to show the breadth of the planet and global investing. They probably are learning in school about environmental matters—introduce them to wind farm tech companies. They also are probably more adept on the web than you are – challenge their google skills to look up wind farms and do some research. Investing insights also can be learned from their vantage point. My wife and I own a large dog and a very small dog. We always laugh when the little one sees that the shortest distance between two points involves walking between the four legs and underneath the large dog! From our vantage point we don’t see it—from hers—it’s obvious. Similarly, young people too have plenty of perspective as mini-consumers… pet shops, clothing chains, technology companies, etc.

In summary, Owen’s two ideas are creative and interesting, and worthy of consideration. And…what better time to do some reflecting on children and consumption than Christmas time!

First published: Nov/09