If you can teach your children the value of money, the importance of saving, how the stock market works and how to invest wisely, that knowledge will give them security for life, constantly put to use to earn them a retirement nest egg or a second income.
Like most adults, we came to appreciate too late the importance of saving and the power of compounding. If you want to have $1 million when you retire at 65, and you start saving and investing when you are 50, assuming the stock market's 70-year average return of 11% per annum, you would have to save $2,199.30 per year. If you start saving when you are 15, you would have to save only $38.57 per year!
It is of course not an easy thing to convince a youngster to think about the future! We therefore need a 'technique' to help us, and we found it in 'The First National Bank of Dad' by David Owen.
This book is sub-titled, “A Foolproof Method for Teaching Your Kids the Value of Money,” and to our mind it delivers on that promise. At 190 pages it is an easy read, written in a very relaxed and humorous style, and full of personal anecdotes.
As parents, we are often conflicted about teaching our children to handle money. We want to give them practice at it, but we usually accomplish that by taking away their responsibility and forcing them to save. Large birthday or festive gifts of cash from generous relatives get whisked away from them and deposited in their savings account, out of their control, because we don’t believe they will spend the money wisely. A child finds it hard to appreciate the need to save for college or a car or some other event way in their future, and the amount of money they earn on their deposits is so small as to be irrelevant (why is it called ‘interest’ when it is so uninteresting?).
It was while thinking about these problems that the author came up with The First National Bank of Dad. This bank pays its depositors 5% interest a month on unused cash balances, which with compounding would equate to a 70% annual return (he does make it clear that he doesn’t accept deposits from adults, or from anyone who didn’t receive half their chromosomes from him!). The children’s accounts were funded with an initial $25, their allowances were deposited on the first of the month, and after that they were completely in control, to spend or save, no questions asked. Not surprisingly, once they could see the advantages of letting their money ‘charge up for a while’, they voluntarily saved a good part of their income. They realized that, if they deferred consumption for a while, they would eventually be able to consume more.
As the children became older, he eventually opened the Dad Stock Exchange to teach them about stock market investing. Once again, the ‘rules’ were easy to understand and implement but they were very effective in achieving their learning objectives. However, I won’t spoil the plot by explaining them here – you’ll have to read it!
Do whatever you have to do to get your hands on this wonderful book. Our only regret is that it was published too late for us to use the excellent, easy-to-implement ideas on our children. However, now that they're grown and have kids of their own, this book will be top of our present list for them to read and, hopefully, put into practice.