What exactly does a five year old need money for?
Now that we've definitely tentatively decided to give Lasse an allowance, my husband and I turned to the next logical question: what exactly does a five year old need money for? After all, we pay for his food and clothes and swimming lessons and etcetera. Whilst an older child might certainly be expected to buy certain items themselves, from toys to books to movie tickets, we are not at the stage of expecting Lasse to afford his own “wants”.
After an interrupted conversation in which I was half hanging out a downstairs window, painting the frame, and my husband was calming the baby, we came to conclude that we want Lasse to have a bit of money in order to start to learn in a real way the power of saving. We want him to see with his own eyes, and through his own coins, that saving money is a way of building opportunities and choices for yourself. After all, this is perhaps one of the most critical ideas about money there is.
Money doesn't buy happiness, it buys choice.
I want him to see that if he spends one dollar this week, and one dollar the next week, he will never be able to buy the big Lego kit he has his eye on — but if he saves those dollars, he will eventually be able to afford the kit.
That said, I don't want all his early interactions with money to be about buying. (In fact, Lasse has very few opportunities to spend money at all, as he rarely goes with us to stores. The exceptions are the grocery store and the hardware store, but still he doesn't go often.) The point that I am coming to realize is that, deep down, I do not want to encourage Lasse to look for happiness through the act of buying, or of accumulating material things. I do not want him to constantly be thinking that he needs another toy, that another toy will make him happy or happier. He is happy. He is one of the happiest people I know. And he is happy because he finds joy in playing outside, in visiting the library, in building with his Legos, in helping make bread, in swimming, and in mundane days at home.
Right now, Lasse doesn’t care much about buying things. Oh, yes, once in a while he’ll point to a picture of a toy — usually from the back pages of his marble run booklet — and ask if he can have it. But on a day-to-day basis, buying things isn’t on his radar. And I don’t want to add it just yet.
There is a fine line here: on one hand, I want Lasse to learn about money in a real way (read: by making his own choices and mistakes) at a young age so that when he is older and has more money, he will already have internalized some key lessons. On the other hand, I wince at the thought of him making any mistakes with money at all. But he has to have the chance to try. After all, the views he takes on money as a older child and, eventually, as an adult, might well be different from mine — and I need to accept that there is nothing inherently wrong with that.
And so: if the point is to show Lasse the power of saving money, rather than overly encourage spending and buying, how are we going to do that?
Savings accounts, compound interest and the Bank of Mom & Dad
We could take a traditional route and open a savings account for him. But given the amount of money he now has (about 12$), the going interest rates on savings accounts (practically nothing), and his age (he’s five), opening a savings account for Lasse through a bricks-and-mortar bank or an online bank is not greatly appealing to me right now. What does appeal to me, though, is the basic premise (or, at least, what used to be the basic premise) behind a savings account: watching your money grow. If we want to teach Lasse about the power of saving money, then that money needs the opportunity to grow. It may be too early for the stock market, but it isn’t too early for compound interest.
What if, at the end of every month, the Bank of Mom & Dad pays interest on the balance in Lasse’s piggy bank? And what if that interest rate were enough to be meaningful — say, 5% or even 10% (at least for now)? And we could chart the growth with Lasse, using graph paper and simple bar charts. Oh, I get giddy just thinking about it.
First, I think, we’ll have to try to explain percentages to Lasse, so that he understands what is going on. But the premise of the idea strikes me as a terrific teaching tool going forwards: not only will it show our boys firsthand the power of saving money (after all, money that is spent won’t earn interest), it will also teach them about compound interest and the ways in which money can grow over time.
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