A First-Grader's First Foray in Finance

I had a hilarious conversation with my daughter last fall. We were reading Little House in the Big Woods, a classic book about a settler family in Wisconsin. I asked my daughter if she could believe that Laura and Mary, the two young girls in the story, each had only one dress and one doll. If either ripped her dress or lost her doll, there was no money for a new dress or a new doll.

My daughter wanted to know if I had such a deprived upbringing. I said, "No, I grew up with toys and books and more than one change of clothes. But can you believe that when I was a kid we had only one television, with only black and white colors, and we changed channels with a pair of pliers because the channel knob broke and there was no such thing as remote control?"

"Wow!" she said, "No color TVs. No VCRs. No videos. No computer games. No CDs. Think of all the fun you missed!"

Well, actually, I had a lot of fun growing up, but this conversation reminded me of the challenges of raising children in an increasingly affluent society. How do you begin instructing your child in the virtues of planning and saving when you have the ability to gratify his or her wishes instantly?

My wife and I had been talking over the idea of starting our daughter with an allowance. We polled our friends with older kids and learned that, at least in our area, zero to $5 a week was the range for first-graders. We decided on an allowance of $1 a week to start, with the thought that if things went well, maybe $2 a week would be appropriate for a second-grader, $3 a week for a third-grader and so on.

We decided against giving our daughter cash in hand. For one thing, we still want some control over what our child purchases. (Candy and Pokemon cards are out!) Also, she hardly has the opportunity to go shopping on her own. Opening a passbook saving account -- the investment vehicle of choice when I was a kid -- was not an option however. Few banks offer such services anymore, certainly not without fees.

Instead we created an account at the "First Bank of Dad," actually an account in my Quicken home accounting software. We established the account on Sept. 1, 1999. Each Monday, I credited $1 to the account. At the end of each month, I credited 1% of the balance in interest, e.g., after four weeks the balance was $4 and I credited 4 cents interest. Is this a realistic interest rate? Of course not, but for a first-grader who is still learning addition tables, the concept of a penny of interest per dollar of balance is pretty readily grasped.

Date	Description	Memo	Amount	Balance
9/1/99	Opening Balance		-	-
9/6/99	Allowance		1.00	1.00
9/13/99	Allowance		1.00	2.00
9/20/99	Allowance		1.00	3.00
9/27/99	Allowance		1.00	4.00
9/30/99	Interest		0.04	4.04
	Etc.
12/31/99	Interest		0.17	17.42
1/3/00	Allowance		1.00	18.42
1/10/00	Allowance		1.00	19.42

The postholiday lull seemed like a good opportunity to introduce the allowance concept. My daughter wanted to make stuffed sock bats as described in a craft book she'd received. The project required pipe cleaners, plastic eyes and a pair of black socks, which we didn't have on hand. I told my daughter about her allowance account, which at that point had a balance of $19.42, and said she could pay for the supplies out of her account.

Since it was Saturday, we went straight to the local craft store and bought the eyes and pipe cleaners for $4.33. For the socks, I said she had a choice. We could go to the Gap GPS and buy a pair of socks for $7 or go to the local Goodwill store and buy socks for $1. She said, "I believe we'll go to Goodwill."

Date	Description	Memo	Amount	Balance
1/10/00	Allowance		1.00	19.42
1/12/00	Craft Studio	Eyes, pipe cleaners	(4.33)	15.09
1/12/00	Goodwill	Socks	(1.07)	14.02

Later that week, after the bats were hanging over her desk, we spent some time at my computer going over her account. First, I carefully recorded the expenses for the project, then I printed off a transaction report so that my daughter could see how her account had grown with each allowance deposit and interest credit, and declined with the expenditures. I explained the interest concept and mentioned that if she deposited more money, more interest could be earned. With dollar signs shining in her eyes, my daughter very quickly counted out her life savings -- $25.99 in tooth fairy money, gifts from grandparents and so on. She gave the money to me and I recorded the deposit in her account.

A month later, my daughter asked if she could buy a horse-farm set she'd seen advertised on TV. This seemed like a good opportunity to do some comparison shopping on the Internet, so we checked out the product on the Toys R Us TOY and eToys ETYS Web sites. Toys R Us had the cheaper price but the shipping cost was high, so instead we swung into the local Toys R Us store that weekend and found that the toy was on sale, saving her even more money.

Date	Description	Memo	Amount	Balance
1/26/00	Deposit	Found money	0.26	42.27
1/31/00	Allowance		1.00	43.27
1/31/00	Interest		0.43	43.70
2/7/00	Allowance		1.00	44.70
2/14/00	Allowance		1.00	45.70
2/19/00	Toys R Us	Horses	(9.73)	35.97

After seeing the movie Toy Story II, my daughter wanted to buy dolls of the main characters, Buzz Lightyear, Woody and a new female character, Jessie. Again we checked prices at the Internet toy stores, but this time found that the cheapest price for these dolls was in the DisneyDIS catalog. (Buzz and Woody together cost $39 and Jessie was $20.) Problem was, even after counting out and depositing her penny collection, my daughter's account only added up to $42.63.

Date	Description	Memo	Amount	Balance
2/24/00	Grandmother	Washington's Birthday Gift	1.00	37.97
2/26/00	Deposit	Deposit Penny Collection	4.66	42.63

I told my daughter I could "lend" her the additional $16.37, but if I did I would charge her 2 cents for every dollar she borrowed until the loan was paid off. I also pointed out that if she spent her money all at once, it would be at least four months before she could buy anything else. My daughter thought very carefully and decided to get just the Jessie doll for now. Then, if she really liked the Jessie doll, she would save up for the other two.

Date	Description	Memo	Amount	Balance
2/26/00	Disney Store	Jessie Doll	(20.00)	22.63

So what have we learned so far in this parent-child collaboration?

• Keep it simple. A penny earned per dollar saved makes a lot more sense to a young child than tying interest to the Fed Funds rate.

• Introduce concepts one at time, and leave lots of opportunity for questions and discussion.

• Stretch out the process of buying something; give your child the opportunity to consider whether he or she really wants something or is just reacting to an advertisement.

• Set a good example by limiting impulse purchases, explain to your child how you set aside money for a new computer or car or a vacation.

I'd like to hear your ideas for educating children about money. We've set up a message board for that purpose, or you can email me.