Advanced Personal Finance

I’ve been interested recently in teaching my kids (well, really only my daughter since my son is four months old) about money. I’ve opened bank accounts for both of them now, but that hardly counts as a start. Some commenters, though, have correctly pointed out that by simply observing how my wife and I handle out financial affairs, they’re learning. Maybe we’re doing something right, because my little girl has shown her stuff already.

Like I said, I’ve been interested in how to teach my kids about money. Like any good nerd, I turned to books to help me. When I saw The First National Bank of Dad on our library’s shelf, I thought it might be worth a look. Boy was I right.

The First National Bank of Dad, written by David Owen, is a short, fast, and often funny read about a subject that’s not always short, fast, or very funny - personal finance. The best part of the book, though, is it’s about more than personal finance. It also touches on knowing what’s important in your life and how you can help your kids figure out what’s important in theirs.

The book has only nine chapters and Owen keeps them short. In fact, at only a 190 pages, I think I read the entire book in a day and a half. In the first four chapters, he goes over how he used his First National Bank of Dad to bring the idea of saving to his children’s minds in a way they could grasp. He then goes over basic investing terminology for when that comes up as the kids get older. Owen closes, surprisingly with two chapters that at first seem unrelated to the book - one about priorities and one about reading to your kids. He makes it all fit, though, and the results are excellent.

The bank in operation

The idea of the First National Bank of Dad is that kids think shorter term than many (but not all) grown-ups. As a consequence, learning about personal finance in general, and saving in particular, has to be put into a frame of reference they can understand. Owen’s method for doing that is to offer his kids a really attractive return on their money, payable by him, if they choose to save it. He offers such a good rate that his kids can actually see a difference in their ‘balance’ from month to month.

A key component to the proper functioning of the concept is that the kids must be allowed full responsibility and freedom over their own money. Once an allowance is given, it is theirs. They can spend it immediately and frivolously, they can save it, or they can give it away - their choice.

This is where I really learned something from this book. I’d always read that the way to teach kids about money was to give them an allowance (and there are two schools of thought as to whether that allowance should be tied to chores or not) and then prescribe for them a certain formula of where that money will go. In other words, even though the allowance is ‘theirs,’ they must save 20%, give away 10%, and the rest is theirs to spend.

What Owen writes, and I agree, is that this means that the allowance isn’t the kid’s at all - it’s still yours. You wouldn’t dream of telling someone else what to do with their paycheck, yet that’s precisely what people who use this technique are doing. The kids must be allowed to do whatever they want (that is safe and legal) with their money.

The objective in teaching kids about money, of course, is for them to learn. How are they going to learn if the rules of the game don’t allow any freedom to make and learn from their decisions?

The Dad stock exchange

As his kids got older, Owen wanted to introduce the concept of investing. He did that by shutting down the Bank of Dad and opening the Dad Stock Exchange. He put nearly all of their money into his version of a money market fund and ‘invested’ some of it in the new exchange. For simplicity, Owen based his exchange on real companies and stocks, dividing their real prices by 100.

It turns out that again his kids learned some valuable lessons on investing, but didn’t have to lose a fortune to do it. They discovered stocks, bonds, and mutual funds. And they did it on their own.

The First National Bank of Dad was just the book I was looking for when I set out to learn how to teach my kids about money. I likely won’t execute as perfectly as Owen describes, but the book gave me a lot to think about and changed my opinion about allowances and giving kids the freedom to spend them however they want. If you have kids and want to get great ideas for how to help them learn about personal finance, I strongly recommend The First National Bank of Dad.

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Kids listen to everything.  And just so you don’t think this post is about kids, I’m referring to how my daughter picked up on something regarding saving.

Just recently, we decided to open a savings account for my four-year old.  A few days after I did, a packet with kid-friendly marketing material came that we shared with her.  We didn’t really get into it, but we just explained that we’d opened an account for her and why.  As these things tend to go, she seemed at best marginally interested.

That’s why it brought a smile to my face a couple of days ago when I picked her up from daycare.  She showed me a dime she’d found.

Daughter: “Daddy, look what I found.  A quarter!” [She’s too little to know which coin is which.]

Me: “That’s great!”

Daughter: “Can I put it in my savings account?”

Can you believe it?

We’d mentioned the account maybe twice. I fully realize that, for those without little kids, this story will likely lose some of its impact, but I thought this was a tremendous breakthrough.  She’d gotten the idea about saving just through our family’s everyday discussions.  I was so proud.  Not because she understood saving so much as because she learned something important on her own without being formally ‘taught.’

It was a small encouragement.

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I found this piece from the Wall Street Journal regarding savings bonds and the SSN(s) that appear on them enlightening. You don’t need the SSN of the recipient of a gift of a savings bond in order to buy the bond. We recently ran into this situation when our son was born a couple of months ago.

One of my wife’s relatives wanted to continue a tradition of giving a savings bond to newborns in the family. But the message about her plans came through another relative who was vague about what was happening. This intermediary relative simply said she wanted to pass on our son’s SSN to a family member. Not knowing who or why, we were (understandably, I believe) reluctant to provide the SSN.

It turns out everything was above board and we got a savings bond in our son’s name the other day, courtesy my wife’s relative. A very nice gesture.

According to the WSJ article, Dept. of Treasury likely won’t reissue the bond if you want to change the SSN that appears on it. When the bond is cashed, the bank cashing it records the SSN of the named bearer and forwards that information on to the IRS so they can get paid, too.

One of the big reasons we didn’t want to disclose our son’s SSN was because he could be the victim of identity theft and we’d likely not know it for years. As I wrote before, stealing a minor’s identity is a particularly insidious form of identity theft. Since, unlike you and me, kids don’t regularly check their credit reports, the damage of an identity theft could be ongoing for years.

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After discussing it for a while with my wife, we’ve decided to open a savings account in our daughter’s name. She’s almost four, and we’ve decided now is the right time to start formally teaching her about money. Up until now, most of her financial education has been informal or came from credit card companies.

To that end, I opened a First Start savings account through USAA. USAA continues to be the most awesome financial services company ever. This product is specifically targeted at kids and getting them to save. It is the best saving account for kids there is (And, no, they don’t pay me to write that. Attention USAA: I’d love to start being paid to write this stuff). Here’s why it’s so awesome:

• No service fees whatsoever (for low balance, etc)

• APY of 2.05%, so they actually earn some interest you can point to

• Better-than-free ATM access (USAA not only doesn’t charge ATM fees, they actually refund the fees other banks charge you)

The plan

My wife and I have tentatively developed a plan for our daughter’s finances.

• Her allowance will be $1 per year of age per week

• She will have to put a portion away to donate to charity. My wife suggested we make giving tangible by having our daughter save her ‘charity’ money and purchase gifts that our church suggests for our sister parish and the local needy. I really like the idea.

• The rest of her ‘pay check’ gets split between savings and spending. Which, in practice, means long term savings and short term, since the amounts we’re dealing with are so small.

I’m still figuring out how I want to do it, but I want to develop some sort of ‘matching’ contribution. The idea is to match her long term savings like an employer might match a 401(k) contribution. I’m thinking the best way to do it is in a lump sum at the end of the year. I figure the impact will be that much greater that way, since the match would be a sizeable amount of money. I’m thinking dollar for dollar is reasonable.

One key thing about this whole allowance business is I’m adamantly opposed to tying it to chores. From everything I’ve read on the subject, doing so is counterproductive. The theory behind not tying allowance to chores is that every member of the family has responsibilities to the family (e.g. setting the table or helping with laundry) independent of any allowance.

I never had an allowance as a kid, so I’m just guessing at this stuff. If anybody has suggestions regarding kids and allowances (what works, what doesn’t, did you have one) I’d love to here them.

(By the way, I opted not to get the ATM card with the account. At least not right now )

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Ugh. It was bound to happen. My 4-year old daughter got her first credit card application in the mail yesterday.

After we put the recycling out on the curb last night, I reached into the mailbox and grabbed what was in there. Coming inside with her, I said, “Hey! This letter’s for you.” (I saw it was from AirTran - we signed her up for their frequent flier program)

“Really?!?”

“Yep. Here’s your mail, ma’am,” I said, making a production of handing over the envelope.

She tore right into the letter while I moved on to the only other non-junkmail item. Honestly, I thought AirTran had sent her some plan-related form letter. Soon, however, the real contents were strewn about the kitchen floor.

“Daddy, look! I got a card,” she happily proclaimed. She meant like a birthday card. I look and she’s holding a return envelope. “I’m going to keep my card over here, ok Daddy?” she said as she proudly placed it on her little activity/art table.

“Sure, baby. That’s great,” I said as enthusiastically as possible. I bend down to recover the rest of the envelope contents and am soon slapped in the face with the absurdity of the situation.

Way to go, AirTran. You just sent a credit card application to a 4-year old. Congratulations.

I tore up the application, but thinking about it now, I should have kept it. [Sniff] My baby’s first credit card application. [Sniff]

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