Monday, September 12, 2011

Family Bank

As the pegs and the bank and the checkbook and the responsibility for buying things become established (don’t expect a perfect system right away--let it build, and let the learning come at its natural pace) you can begin to introduce various expansions and additions to the family economy:

Interest: Let the child have a second, interest-bearing account in the bank that is separate from his checking account. Have a passbook in the bank that keeps track. Negotiate the interest, but let it be high, and pay the interest often so their money will grow fast, but put in the stipulation that the money in that that savings account is for college, and agree on the percentage of college tuition that they will pay themselves.

To be honest, we got conned a little by our own kids on interest. When we first told them that the family bank was going to pay interest (and when we explained that that meant that if they just left part of their money in the bank it would grow) they were pretty excited. But our proposal of 5% annually was a non-pleaser! “Annually?” said the 13 year old, “doesn’t that mean once a year? We can’t wait that long.” They proposed once a month, and we compromised at once each quarter or every three months.

Then the 9 year old really got us. He said “I’m not very good at fractions or percents yet, but I could figure 10% because all I’d have to do is move the decimal point!”

So we ended up paying 10% interest each quarter! And it didn’t take that 9 year old very long to essentially figure out compound interest. He said “wow, if I leave it in for two years, it will double?!”

We decided that, since the savings was earmarked for college, why not really shell out the interest and let it grow. Better that part of the money for college flow through the kids, and to have them perceive ownership of it which we hoped would turn into a sense of ownership of their college education.

Transfers to “Real” Accounts: With many families who have instituted the family economy, the practice has been to take 15 year olds down to a real bank (or better yet a brokerage) and transfer all of their money from the family bank account to the real account. Kids who have been writing out checks for seven or eight years are ready for the real thing.

High-interest savings set aside to pay a percentage of College costs: Many of the families we have worked with chose to follow our high-interest policy with the stipulation that everything in the interest-bearing savings account would go toward college. With this in mind, some families pay even more than 10% per quarter. At rates like this, some of you may want to run out and find these families so you can invest your own money, but remember, they are not federally insured!

But seriously, as parents, we want that family bank money to multiply, so that our kids can feel real ownership over the money that will help them pay for some percentage of their college tuition.

One proud dad told us of his experience taking his 18 year old daughter to the college where she had been accepted to pay for her first semester. She had been a part of their family economy for years, and they had agreed that the part of her money that she was saving and getting interest on would be used to pay 20% of her college tuition. He said he watched her hand shake as she wrote out her largest check ever to the bursar. “Dad,” she said, “That is a lot of money!” He said he thought to himself “you should see the check I have to write!” Then came the real payoff moment when the daughter continued, “If it costs that much, I had really better study hard!”

Ownership of one’s own education! Think of the benefits of that! (We will get into it further in chapter)

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