We started the Bank of Mom and Dad, or the Bank of MAD, when our son was about five. The bank of MAD pays a fixed interest rate of 5%, compounded daily. Each child has a passbook into which deposits and withdrawals are recorded. When we remember, we update the interest.
Over several years the kids have actually built up a few hundred dollars each by depositing commissions from chores (we don’t pay allowance – you earn money by doing specific chores), birthday money, and other money they have obtained through various means. I had told my son that the Bank of MAD paid really good rates, but he didn’t believe me until we went to a real bank the other day and I asked about their CD rates. He was amazed that they only paid 1%, and then only if you left the money in there for three years. He now doesn’t understand why anyone would ever deposit money in anything but the Bank of MAD.
My son cleared out his account one time when he was about 9 years old to buy a Nintendo 3-DS when it first came out, and a year or two later to buy an iPod. Since that time he has mainly saved, and actually started a second account in the Bank of MAD to save up money for investing. He’ll put money there until he has raised fifty dollars or so and then we send it into his mutual fund at Vanguard. (He is invested in the MidCap Index Fund, which we started with the monitary gifts we received when he was born and baptized.) The nice thing about using mutual funds is that we can send in whatever amount of money once the initial shares are bought. I usually match whatever he’s putting in, both to encourage him to invest and to make sure he has some money for emergencies when he leaves home. I’ll also send money into my daughter’s mutual fund (she is in the Vanguard Small Cap Index Fund) to match the gift put into his funds. My daughter never really spends money, instead allowing the balance in her Bank of MAD account to grow largely unchecked.
A real interesting effect occurred when they were about ten and seven. They would do a chore, earning $3 say, which I’d pay them in cash. They would then later deposit the money in the Bank of MAD. I would then take the cash and put it back into the drawer where I keep the chore money. I therefore was able to use the same physical bills for several weeks. Eventually my son just started writing in the amount he earned into the Bank of MAD account and not bother with the cash. I started to realize that this was the way finances in the real world work to an extent, where as long as people were saving the same money is circulated several times. The bank finally needs to actually come up with the money when people actually consume money somehow. With the Bank of MAD, eventually the kids would buy something and make a withdrawal from the Bank of MAD, usually in the form of a debit card payment.
Having their own local bank account has definitely helped them learn about saving and finance. My son actually asked for help creating a budget, which he did for a couple of months. An interesting thing with his budget, because his pay was variable depending on how much he worked, is that it motivated him to work more to meet his earning goals for the month. He also insisted we create a budget for his younger sister because he was worried about her saving and spending habits.
Creating a Bank of MAD in your home doesn’t take more than a sheet of paper and a calculator periodically to calculate interest earned. It has certainly helped my children to learn about earning money, banking, and budgeting. Give it a shot and let me know your experiences.
Do you have a bank account for your children, either at home or at the real bank? Do you give an allowance, just buy things for them when needed, or pay them commissions for chores?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.