2019-2020 was an exercise in teaching our elementary school-aged children personal finance, driving independence, and encouraging them to make constrained resource decisions.
As part of our kinderfinance lessons, the First Lennon Bank pays a monthly dividend of 1%. Best interest rate in town, for sure - but it does make for easy math.
February 2019, was the first month for dividends, interest, or bonus payouts. Use the terminology that resonates most with your kids. Ours understand the concept of “bonuses” so we went with that. The goal will be to give them additional vocabulary as we progress.
First, we had to help them understand the difference between active and passive income. I recorded the following talk with Baby Girl in early February.
Mom: “Have you ever heard of Passive Income?”
“No.”
Mom: “Have you heard of Active Income?”
“No.”
Mom: “Active is like activity, where you do stuff. Like a lemonade stand, you do something and you earn money. Or Chores – you have to do something to earn money. Does that make sense? What’s another example of active income?”
“Hot cocoa stand!”
Mom: “That’s right! How does Mommy earn money?”
“Ummmm … You earn money … hmmmmm.” <shrugs>
Mom: “Where do I go every morning on Monday, Tuesday, Wednesday, Thursday, & Friday?”
“Go to the bank!” [She was referring to the bank where I worked]
Mom: “Yep! I have to DO something to earn money. Who else earns money actively?”
“Ms. Inna!”
Mom: “What does Ms. Inna do?”
“She works at the hospital and she takes care of sick people!”
Mom: “Right! She helps their hearts get healthy and it’s amazing. So that is active income! If we stop putting energy into it and stop doing the work, what will happen to the money?”
“Bye Bye”
Mom: “Right. The money stops. Wouldn’t it be great to earn money without having to work?”
“Yay!!”
Mom: “Yeah!! How cool would that be? It’s called Passive Income, where your money works for you, instead of you working for you. How can money work for you?”
“It helps you get important stuff like food and it helps you buy important things.”
Mom: “Well that’s what money is important for, but that’s not how money makes money for you. Have you ever heard of money making money for you?”
“No.”
Mom: “But wait! Didn’t you just get a bonus?”
“Yeah!”
Mom: “Yeah? How much bonus did you get?”
“27¢”
Mom: “Why did you get 27¢?”
“Because I saved $27.00.”
Mom: “Yeah! So what if you had $37.00. Would you get more money or less money?”
“More!”
Mom: “What if you had only $17.00. Would you get more or less?”
“Less!”
Mom: “What’s the relationship between the bonus money and the saved money?”
“Hhmmmmm…”
Mom: “The more you save, the more your money earns for you! Let me ask another question. What does Financial Freedom mean to you? Does it mean anything?”
“Uhhh…. I don’t know what it means.”
Mom: “Financial Freedom is when you don’t have to work anymore because your money is working hard enough for you. Does that sound interesting to you?”
“Yeah.”
Mom: “OK – so if Mommy’s money is working instead of Mommy working, does Mommy have to go to work anymore?”
“No.”
Mom: “So what could we do instead of me going to work?”
“Stay home with us!”
Mom: “What would I do if I stayed home with you?”
“You’d play with us!”
Mom: “Do you think maybe I could come to your school and do mystery reader more and eat more lunches with you?”
“Yeah!”
Mom: “Do you think I could do more class parties or fewer class parties?”
“More!”
Mom: “Could I eat more lunches with you, or fewer lunches with you?”
“More!”
Mom: “Is more better or not better?”
“Better!”
Mom: “Ok! What’s one of the things you wrote on your chore list for today?”
“Spend extra time with Mama.”
Mom: “Ahhh! What needs to be true to make that happen? What do we need to do so we can spend more time together?”
“Save more money!”
Mom: “Savings is good, but what if your money made more money for you?”
“Yay!”
Mom: “What do we call that?”
<silence>
Mom: “Financial Freedom! So if our money worked for us instead of us having to work for money, tell me again what we could do?”
“We could go out more, and we could have lunch together more, and you don’t have to go to work anymore, and you can be mystery reader more, and you could do a lot of things more instead of working in a boring office.”
Baby Girl always does cut straight to the heart of matters.
After several months, preliminary results were in. It wasn’t enough data to start showing a significant trend yet, but again it started the conversations about the benefits of delaying or not spending.
The differences were predominantly tied to spending (or lack thereof). One week the youngest flat-out refused to do her chores, and she saw the consequences with no allowance that week. Another week, Little Man made the conscious choice to forgo payday in lieu of chores after an exhausting camping weekend.
As each month goes by, they witness the difference between the savings and spending accounts. Interest gained on the savings account is very close to what the spending account interest would have been, had they chosen not to spend their money.
As it compounds and they continue to spend, this amount will become noticeably different. After a few months, it is not even a dollar. While a dollar still is meaningful at this age, the gap will become painful as that difference grows steadily.
We chose to set a simple interest rate of 12% annual (1% per month) because it would be easy for them to learn to calculate, and it would be semi-meaningful to them, even at low dollar values. If you choose to adopt this same rate, you may want to take a minute to do a quick amortization table to figure out what the real cost to you will be, especially if you are also paying on their savings account. Using the Rule of 72*, their savings will double in 6 years at this rate. Great for them, as long as you're willing to support this payout! For us, it is worth every penny to teach them the power of compound interest and passive income. Do what works for your family and your family's finances.
* The Rule of 72 is that if you divide your interest rate into 72, the result will be the number of years to double your investment using compounding interest. 72/12 = 6 years. If you pay 6%, 72/6 = 12 years to double. If you pay 3%, it takes 24 years to double. Get it? Good rule of thumb to memorize.
Stephanie Brooke Lennon is the author of Family Bank Blueprint, GoldQuest, and What Would Water Do? Simple Strategies for Navigating Life's Obstacles. Her titles are available in Paperback and Kindle on Amazon.com. Follow Stephanie Brooke on Facebook, Instagram, TikTok, YouTube, Twitter, Amazon, and at BrookeLennon.com.