We started the Bank of Mom and Dad last year, inspired by MMM’s post of a similar nature. It pays a whopping 5% interest per month, as we wanted to demonstrate compounding in a dramatic fashion. Kids were 7 and 9. Our motives were that 1) the kids were accumulating too much crap, and 2) the grandparents, in their generosity, were gifting cash that we preferred the kids invest instead of spending, since they had adequate toys, etc.
The first of every month is compound interest day, and we sit down and review on a spreadsheet how much they’ve made by investing instead of saving. They jump up and whoop on hearing how much they’ve earned, especially as the numbers have snowballed. Both kids have run up to me after finding a few cents on the playground at school to ask me to invest it for them. My son (a lego fiend) has decided that he would prefer to save most of his cash to invest and buy one moderately-priced set instead of buying multiple more costly ones.
Once they hit a set threshold, we will invest it VTI and check in monthly. To prep them for investing, we had series of talks using a lemonade stand analogy. Friend needs $5 to buy lemons, sugar, cups. Loan $5 (bond) pays $6 a year later. Invest $5 for an ownership stake, get $.50 a month in perpetuity. They could do this math and seemed to get it. Built on the talk a few months later: diversify by investing $2.50 in lemonade stand and $2.50 in a hot chocolate stand to reduce seasonal income volatility. Now invest $.50 in five lemonade stands and five hot chocolate stands to reduce risk (indexing).
I’m concerned a market correction could undermine their enthusiasm if they see their numbers plummet once invested, but plan to have them stay the course and learn from the experience if it happens. Wife and I thinking the funds could help buy them phone or car when they get much older. We fund separate 529s for each.
Would love to hear others’ variations on this theme (analogies used, incentives offered) if anyone would care to elaborate!