2019-2020 was an exercise in teaching our children personal finance, driving independence, and encouraging them to make constrained resource decisions. This is one of our teachable strategies.
Growing up, my sister and I had the benefit of parents who had a very deliberate approach to teaching their daughters good spending and saving habits. While formal jobs during the school year were discouraged, we babysat and did odd jobs to earn money on top of a modest allowance.
In the 80s, recycling was a fairly new concept. Recyclers paid you to bring them inventory. It was common to see me collecting newspapers and aluminum cans from neighbors to haul to the recycling facility for cash. I also sold tomato and strawberry plants to neighbors out of our little red wagon. My sister got an after-school job at TCBY one summer in high school, but all in all, most of our income was informal.
We surrendered all of our earnings to our parents, who recorded it on a paper spreadsheet. For every dollar earned, half went into the “Brooks Bank” to be saved, and half was eligible to be spent. Our parents paid 1% interest on the savings balances to encourage the savings habits[1], and when either of us needed cash for spending, they would give us what we chose to withdraw. This was the foundation for the cashless economy that forms the First Lennon Bank.
The net: we could never spend more than half of what we earned. Read that again. Can you imagine?
Looking at this from a different angle, let's consider the subject of income tax. In the real world, almost all earnings are subject to income tax of some variety. The taxman comes knocking like clockwork. Entire industries are built around helping people and legal entities find loopholes and minimize their tax burden.
For most of us, taxes are an unavoidable reality for much of our lives. The gross you earn is only yours to keep if you earn it in a tax-free vehicle - and there are usually strings attached with strict rules around them. While possible to play deep tax games (legally), most of us need to resign ourselves to and plan for taxes.
Although they are quite young, it seemed like a good move to help the littles get used to it now. To that end, we established a 50% tax rate. Yes, you read that right. 50%.
We believe that (a) it is easy to calculate, and (b) hopefully once used to it, anything lower is considered a blessing. It helps accustom them to the real income they earn (now and in the future), and to living within their means. This concept worked pretty well at the Brooks Bank and was fully adopted going forward.
Taxing the children’s income in this way serves multiple purposes. The first lesson it provides is that the amount your employer pays you [or your small business/freelancing generates] is NOT equivalent to your purchasing power. Almost all US income is subject to income tax, with a few notable exceptions that will not be covered in this post.
The sooner each realizes that their paycheck gets an automatic haircut, the more they’ll frame their thinking around it appropriately. They can’t fight the IRS, so it’s best to find a way to deal amicably with it. If you know you want X of net, negotiate Y of gross to cover the government’s portion. X was never fully yours to begin with. I believe that since I grew up with access only to half of anything I made, it helped me look at taxes in a somewhat neutral light, while teaching me to live below my net income, vs my gross.
In our family's reality, this 50% is not going to the IRS. Consider it to be forced savings. In the chickadee’s case, the mandatory 50% haircut is going into interest-bearing savings accounts. It is tracked alongside the spending ledger and is held in custody until after each one graduates high school and heads off to college [or whatever their post-high school experience is to be].
Regardless of the IRS or a savings account simulating the income tax, the goal is to encourage a high savings rate, while illustrating the power of compound interest and passive income generation. It's the introduction to the concept of Financial Freedom at the earliest of ages.
Imagine your children's financial outlook when they start their adult lives with a financial cushion of their own creation. It is incredibly powerful!
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.