We met with one of the branch staff and discussed opening a checking account for minors. A few documents were signed, and I received my passbook. This was where I was to record every deposit and withdrawal to be sure I knew how much was in the account. Deposits were typically from mowing lawns, birthdays or special occasions, withdrawals used for a few packs of baseball cards or maybe an ice cream cone. Once, I even saved up enough to buy a 13” black & white television that I found on sale at Kmart.
The biggest joy of this moment was learning about interest. The more money I saved, the more the bank would pay me. While it’s difficult to find precisely what the bank was paying back then, according to this chart of CD rates, it was probably somewhere around 7%. That means if I had $100 in my savings account, the bank would pay me $7/year for, in my mind, doing nothing. It may not sound like much, but $7 probably bought close to 10 packs of baseball cards back then.
Over the last several years, I’ve been working on providing the same kind of experience for my daughters. I’ve blogged about some of these challenges in the past, but as they get older and these conversations get more sophisticated, I’m reminded over and over how much times have changed.
Let’s take a look at a few reasons why and how to share these lessons in our current world.
Lack of Interest
While this could at times describe my daughters’ level of excitement in discussing finance, in this case I mean the literal lack of interest being paid in today’s low-rate environment. Showing my girls that a high-yield savings account might yield 40 or 50 cents if they save $100 for a year doesn’t exactly have them begging Mom & Dad for a trip to the local bank branch.
Not that they would care to buy any, but for reference a pack of baseball cards today runs around $10. To save enough to buy 10 packs at the end of the year, the girls would have to save up around $20,000. That’s a LOT of babysitting.
Cash is no King
When we initially started the girls on an allowance, we used cash and envelopes as a physical way to show how much they could spend, save and earmark for giving. As they grew and started to spend on their own, we quickly learned cash was more of a headache than it was worth. Many places won’t accept cash. When friends split a meal at a restaurant, they generally use Venmo, PayPal or some other cash app to share funds. Generally speaking, cash has little use in their young lives and, as we see the pandemic speed up cashless policies in food markets, concert halls, and sports arenas, it will likely be used less and less by us all.
It won’t surprise most that passbooks are largely a thing of the past today. In their place, a world of technology that can blow the minds of even those of us who deal with personal finance every day. Most banks and other financial institutions have some products and tools for young people, ages 13+ in most cases, younger in others, to manage and learn about their money. It’s often best to start with your own bank or read this New York Time article for some of the things to think about when looking for solutions.
In terms of tracking finances, debit cards, allowance, etc., Bankaroo, BusyKid & Greenlight are just a few of the well-known apps out there. Depending on the age of the child and what you are trying to accomplish, talk to your advisor about which tool might best suit you. There are fees involved with some of these products, so making sure you’re selecting something that you and your child or grandchild find practical and easy to adopt will ensure you’re getting value from these tools.
While compounding interest from their savings account may not be exciting, kids today are more attuned to money and markets than ever before. Their favorite sports, tv, movie and music stars aren’t just sources of entertainment, many are shrewd business people, building brands not just through being spokespeople, but actually taking interest in companies and building their own.
We’ve been most successful with getting children engaged in the market by having broader discussions around what the role of different investments in a portfolio, why diversification matters, but that it’s also important to invest in what you believe. With several children, we’ve opened small brokerage accounts where we invest in a diversified fund of funds which holds companies all over the globe, but also ask them to pick two or three companies in which we buy a few shares. When the experiment works best, some of the companies outperform, some underperform, and the fund of funds falls somewhere in between. The important thing here is to make sure they understand the difference between risk and reward, investing and speculating and that the market is not a game. While banks may not pay much interest on their money, they also offer a safety level that most other vehicles do not.
There are lessons everywhere in life that revolve around finance. Our children are more aware than we sometimes realize, and it can be very beneficial to talk them through decisions you’re making every day that they may have questions, or even insights, about. Little things like going through a decision to buy a bigger item at the grocery based on unit price, or what really goes into the total cost of an Uber Eats or DoorDash order are just a few examples of the types of conversations that can help your child or grandchild normalize discussions around how money interacts with their lives.