The Bank of Dad, a year later

Having read the book The First National Bank of Dad: The Best Way to Teach Kids About Money something like a year ago, and put its ideas into effect in our household, I thought I'd report back on how things have worked out.

The gist: I enjoyed the book, its ideas are easy to implement, and I recommend it to any parent who is considering starting an allowance plan for the kids.

In our family, the relevant kids are 8 and 10 years old now. Based on the ideas in this book, we established allowances for the kids, and I maintain simple accounts for them. I add their allowances to their accounts weekly, and when they spend money, I deduct from their accounts. This way the kids don't have to carry cash around, and yet whenever they ask me for something, I can tell them to use their own money to pay for it. I also apply interest to their accounts -- 5% every month.

Now, what works and what doesn't work about this system?

The intent of the Bank of Dad idea is to address several problems:

1. Kids asking you to buy them things
2. Kids growing older without a sense of the value of things
3. Kids being unable to understand the value of saving when interest takes too long to accrue (relative to a child's time sense)

Those, anyway, are the big items that I remember from the book.

Item 1: The system is a lifesaver in this respect. The advice is to stop making judgements about what your kids want, and let the decision be based on whether they have enough money for the thing. So instead of arguing about some crazy worthless toy, let 'em buy it, and learn for themselves whether it's worthless or not. The dollar amounts aren't very high, and it's important for them to make their mistakes with small amounts of money.

We've applied this decently well, and it helps avoid a lot of arguments.

Item 2: Sense of value. I guess I started to talk about this above. The point is that they're now making judgments of value all the time. This has worked okay. My 10 year old thinks about this stuff more than he used to. My 8 year old has little patience and usually buys whatever she wants when it's in front of her; the heartbreak is when it's something from the convenience store she could get for half the price if she just waited for a trip to the supermarket.

Item 3: Interest and saving. The theory here is that you give the kids a really high interest rate, one that would make any adult's heart beat fast...5% per month. The idea is that real interest rates are too small to incent a kid to save. Well, my kids have taken little notice of the interest so far. After all, it still doesn't amount to much...if a kid has $20 in the bank, that's $1.00 he gets in interest. Since we're giving each kid at least $2 a week, the interest just doesn't seem like much.

Still, the paper account system has enough benefits to make the system worthwhile. And my older kid has done such things as set up separate savings accounts and ask me to deposit his money and keep it inviolate.

Another virtue of the system is that I can reward the kids with money without actually having cash handy. The kids love the system, too.