A wise woman once asked me, “what is the point in discussing retirement or estate planning if the people who inherit whatever money you leave them then go and squander it?” I’ve often debated how to address money with our kids, though I have generally steered away from the topic on this site. As a parent, I try to balance the need for our kids to appreciate the importance and finiteness of a resource without causing them to fixate on it.
Money is a tool, and like any tool, it can be cultivated to offer options to the holder. In trying to teach our kids the value of hard work and building for their futures, I sought to find a way to get them to put the concepts into practice in their own lives. At first, I foolishly attempted to explain compound interest to our three kids who are approaching their teenage years. Ordinarily when dad talks, eyes glaze over fairly quickly, but this time, I gained zero traction from the outset.
Compound interest is simply too counter-intuitive. It’s hard to explain to kids that $500 invested at age 10 (assuming an 8% annual return) becomes $50,625 at age 70. Even adults, who are generally oriented toward instant gratification, have trouble seeing this data as relevant. That is in part because that same $500 invested at age 10 is only $2330 at age 30, $5031 at age 40, and so on.
In fact, I scoured Google for a chart to illustrate investing using compound interest for kids under the age 13, and I came up with nothing graphically or pictorially to show them.
It was apparent that I had to try a different tactic. I’m not a fan of child bribery – not for moral reasons mind you, but because it doesn’t work. The kids start to slowly exert greater leverage in each negotiation, and the next thing you know, you’re headed to Dairy Queen for the third time in a week (that happened a lot during the shutdown, and sometimes the kids were the reason).
Accordingly, I decided to create a system where I would match whatever savings the kids invested. Once they had saved $500 that year, I would open a Roth IRA for them. And thus, The Bank of Dad was born.
For one year, the kids mowed neighbors’ small yards on Fort Leavenworth, Kansas, earning $20 to do so. They knew they could keep the money or receive a matching contribution if they invested in The Bank of Dad.
I can’t say that the money always got invested. We have one profligate spender in our midst and someone who occasionally cannot resist the Siren songs emitted from the Ice Cream Truck.
Once the kids had scrounged up $500 from lawn mowing and other odd jobs, we opened an account at Vanguard. We deposited the money earned in a Roth IRA. The matching contribution was deposited in a separate brokerage account (note: the Goodell household is NOT an eleemosynary institution; some of the Bank of Dad matching funds went to the cost of filing their tax returns).
Roth IRAs can only contain that which you’ve earned, and the match from The Bank of Dad is not money they earned according to the IRS’s definition. At $500, I am well below the annual gift threshold, which remains at $15,000 for 2021.
As fortune would have it, the money cleared Vanguard in mid-March, so everyone bought broad-based index funds at or near the bottom. In a grander stroke of luck, my daughter’s money didn’t clear for a few extra days due to a glitch at Vanguard, so she invested hers on March 23, 2020, at the exact bottom. By then the market was an additional 8% lower. I cannot wait for the compound interest-induced sibling rivalry that is sure to commence once the numbers start to grow over time.
At the end of every quarter, I show each kid the growth or drawdown in their portfolio returns. They are learning how to save and invest now, and thanks to some excellent timing, they also grasp the power of positive returns in the market.
To build self-sufficiency, I’ve also taken them off the government dole (no, really, I work for the government, so basically this Keynesian experiment is being subsidized by the taxpayers). They know if they want to make money going forward, it is on them to earn and invest it (I’ll still pay the tax preparation fees… probably).
They were ready to replicate the plan again this year, but anyone who went Trick-or-Treating knows how excited people are to deal with kids knocking on their doors in a pandemic. My middle daughter pivoted in true Capitalist fashion to try to sell homemade soap door-to-door at the outset of the pandemic before I realized what she was up to. I had to explain what the concept of “profiteering” was and why, as a society, we eschew that sort of thing. I’ve never been prouder, but out of a sense of decency, we had to stop in-person money earning this year.
One final admission: this is not a story of sunshine and roses. I often had to forcibly eject our kids from the house to earn the money. When given a choice between earning money doing manual labor or sitting like gelatinous cubes on a couch playing video games, kids are going to select the second option regardless of the amount of additional contributions offered.
I’m sure there are self-starters out there, but not nearly as many as parents like to pretend when discussing such things publicly. Therefore, I had to employ all the emotions to get them out of the house: positivity, pride, guilt, fear, rage (those last two are really more aptly categorized as “fear” of “Dad’s rage”).