Sunday, May 14, 2006

Book Summary: The First National Bank of Dad

It's been a while since I last posted a book summary. This one is for "The First National Bank of Dad," by New Yorker writer David Owen.

I first encountered David Owen's take on teaching kids about money, in, of all places, an airline magazine. I tore it out and saved it for the far off day when someday I'd be a father.

Fast forward 10 years...I was taking the kids to the library, as is our habit on Saturdays, when I saw "Bank of Dad" in the staff picks section. I instantly recognized it as the book version of that tattered airline magazine article.

So I checked it out and devoured it. It's a great book, well-written, and full of good advice with lots of concrete examples. One thought that occurred to me is that there might be a business in offering family banking software, especially as a Web app. Alas, I checked out the book on Amazon, and it looks like it's not a big seller. No matter, it can still help you in the way you think about money.


The First National Bank of Dad
by David Owen

1. The problem with savings accounts
* Parents use them to control consumption, as opposed to promoting savings
* Interest rates are too small and long-term goals too remote to be a motivator
** "Encouraging a kid to save for college is like encouraging a 50-year-old to save for the colonization of Mars."
* The rational response by kids is to try to spend all money immediately, or hide it so it can't be "saved" (confiscated by the parents)

2. Making children become savers
* Children need selfish reasons to save
** Tangible, timely rewards
* Child-sized rates of return
** 5% per month (a doubling every 15 months)
** Switch to 3% per month after a year or two

3. How children act when it's really their money
* No pressure to spend (because it's not being confiscated)
* Strong desire to save (to take advantage of interest)
* Best of all, no need for the parent to harangue the kids to save

4. The mechanics of banking
* Set up a cash machine with 5s and 10s. Have the kids record their own withdrawals. Charge any losses against all depositors equally.
* Don't worry about lecturing the kids about the financial system. They'll figure it out.

5. Responsibility and control
* If a kid doesn't control the money, there's no reason to be careful with it. "My children are often quite irresponsible with my money, and why shouldn't they be? But they are extremely careful with their own."
* This makes the kid ask, "is this something I really want," instead of "can I talk Dad into paying for this?"
* Prior to vacation, give them spending money, but then tell them they won't get any more during the vacation.
* If you need to do something boring, give the kid some money in advance, but warn that you'll take it back if he doesn't behave. Alternately, having them select one book.
* For a dinner party, a mom gave her boys $5, but said she'd take back $1 each time they came downstairs for a non-emergency, or made enough noise to warrant a visit.

6. Allowances
* To become responsible spenders, kids need to be given opportunities to spend, to make both wise and foolish decisions, and to learn the consequences of those decisions.
* A child's financial resources should be more than enough, but not too much.
* Try asking the child what they think is appropriate. Such requests should be made in writing.
* Children should not be required to save or donate some portion of their allowance--this is something that have to decide on their own. Compulsory charity is not charity.
* Allowance should not be linked to doing chores. But you can pay for project work.
* You should pay both older and younger sibling for babysitting.
* Grownups do chores out of self-interest. See if you can appeal to your kids' self interest. This isn't always easy.
* Set up your bank to automatically pay your kids their allowance.
* If you retain control over the purchase, you should pay for it. You don't want your kids to give crummy presents, or try to get through school without needed supplies because they're cheapskates. Same for family trips and treats. Don't take your kids out for ice cream, then make them pay.
* You should pay for upgrades. If you're willing to buy him a $30 backpack, and he wants a $50 backpack, let him pay $20 and get the one he wants.
* Kids shouldn't work (unless it helps them learn). If work is so educational, why not drop out and work at McDonalds?

7. Driving
* Pay for expenses like gas if you're deriving economic benefits (e.g. someone else is driving the younger sibling around).
* Pay quarterly good driver bonuses

8. Bank accounts
* Let your kids open accounts and get debit cards. It will prepare them for later on in life.
* Encourage them to pay for textbooks, etc., and then request reimbursements. This will improve their accounting and management skills. Give them practice doing things now, so that when they have to do them later, they'll be ready.

9. eBay
* eBay is a great way for kids to get hands-on education in the principles of free-market economics.
* It also encourages a feeling of ownership, since all your kids' junk is now monetizable.

10. The Dad stock exchange
* "One of the most useful services that we can perform as parents is to provide our kids with opportunities to screw up in interesting ways that make lasting impressions but do no genuine harm. We all learn mainly by trial and error, and our most important insights often arise from our biggest mistakes."
* With investing, let kids start screwing up as early as possible, since most valuable lessons take a long time to sink in.
* The DSE trades public securities, but for 1/100th the listed price.
* Pick a small number of stocks in which to make a market, companies the kids will be familiar with (e.g. INTC, MSFT, NOKA, MCD, GAPS). Start them off with shares in all of them.
* Let them do whatever they want, including selling all shares and closing their account, or moving all their savings into it.
* Handle dividends by crediting them once per year based on annual yield.
* After they understand stocks, add in mutual funds as well.
* Don't tell them how to invest--let them learn on their own.
* Start up the DSE once kids wnat real bank accounts (thus shutting down the Bank of Dad)

11. Beyond money: True net worth
* If you had to flee your home because of a fire, and could only take what would fit in a cardboard box, what would you take? (e.g. photo albums)
* What makes you happiest? Encourage your children to think carefully and pragmatically about the real sources of their happiness.
* The basic unit of intrinsic value is the hour. Everyone, no matter how rich, has a limited number of hours.
* The most important investment you can make is to read to your children and develop their joy of reading. And this means reading aloud, and reading what they want to read, rather than imposing your own judgments.

1 comment:

K said...

I disagree with some points especially about kids working.

Kids should work. It teaches them time management, money management, builds self esteem, adds lines to the resume, gives them incentive for school (when they realize that with more education, they get better jobs), and keeps them busy (out of the malls).

However, its best that they try a variety of jobs including sales jobs and starting up a business or two.