Planning

Revisiting the Bank of Dad

Last year, I told you about how I started my own bank. It’s called the Burton Bank, and it has one customer: my 7-year-old, Iris.

The Burton Bank is based on David Owen’s book, The First National Bank of Dad. Here’s how it works:

1. Every week, I automatically deposit Iris’s $2 allowance.

2. Iris can spend her money whenever she wants on whatever she wants, short of cigarettes or beer. If we’re at a store and she doesn’t have cash with her, I’ll front her the money and enter it as a Burton Bank debit when we get home.

3. On the last day of each month, the Burton Bank pays 5 percent interest. Yes, 5 percent a month. When you’re a kid, time moves so slowly that the 1.1 percent APY you get on a high-interest savings account is indistinguishable from zero. Come to think of it, that goes for most adults, too.

The Burton Bank has been in business since November of last year, so I figured it would be a good time to check in and see how it’s going.

Hoarding and spending

I originally heard about the Bank of Dad concept from Zack Miller, author of TradeStream Your Way to Profits and father of five kids aged 4 to 16. “We have hoarders and we have spenders,” says Miller. “There’s nobody in the middle.”

Mine’s in the middle—or maybe she’s a bipolar spender. Immediately after we established the Burton Bank, Iris deposited her existing savings and then spent several weeks saving up her allowance and some birthday money to buy a $60 Lego castle set involving evil knights and a princess whose little yellow head has a happy face on one side and a sad face on the other. Then, once the toy arrived, she started teasing me about how I have a crush on the princess.

This was an impressive financial feat, I thought, saving up seven times her monthly income for a major purchase. Since then, however, the Burton Bank has never had a balance over $30, because Iris keeps buying Lego-related books in the Bionicle series. If you aren’t familiar with this series, it is the most blatant attempt to sell toys in the history of product tie-ins. In the second book in the series, all six of the main characters fall into a pool of goo and mutate into slightly different creatures, and you can buy Lego sets of the “old” characters or the new ones.

At least, you could before Lego blissfully discontinued the Bionicle series.

Dad’s off the hook

One of the best things about establishing a family bank is minimizing the amount of time you argue with your kid over whether you’re going to buy them something dumb. If Iris wants to buy a toy, she buys a toy. If she doesn’t have enough money, she knows I’m going to give it to her…at the usual pace of $2/week.

That’s going to get more complicated as Iris gets older, however. “It’s really hard to continuously define what we pay for and what we don’t,” says Miller. Clothes, for example. “I do believe parents should pay for a basic wardrobe. But what is the basic wardrobe?” Transportation to school? Covered. Transportation to a party? Hmm.

Still, though, it’s better than the usual system of constant handwringing. “There’s been some friction there, but less friction than before,” says Miller.

Charity and frugality

One of the more controversial aspects of the family bank is that you don’t force your kid to make charitable contributions. True charity is voluntary, and all that. Iris hasn’t done any charitable giving. I suspect this has something to do with the fact that she probably has no idea that her parents do any charitable giving, because we haven’t involved her in the conversation about our charitable goals, and our donations are automated. This is definitely something we should revisit.

Miller has had better luck: his eldest daughter has saved up $80 to give to a charitable cause. Which one? She hasn’t decided yet.

Both Miller and I have found that the Bank of Dad helps a child understand that money isn’t an unlimited resource without having to spout money-doesn’t-grow-on-trees platitudes. “My eldest received a Kindle at one point from her Grandma,” he says. “We did some research to find free books. She’s become more creative in finding solutions that don’t involve spending money. She used to buy books, and now she’s been going to the library and taking out books.”

Mental accounting

My wife and I have always been vocal about setting specific savings goals and establishing separate bank accounts to help reach them. In principle, a single pool of money in a savings account buys you the same stuff as ten separate savings goals labeled “Japan vacation,” “Laptop,” “Birthday,” and so on. In practice, however, it’s too easy to take $50 from the big pool for whatever expense came up this week. Take $50 from the birthday fund, however, and you’re stealing somebody’s birthday present. I trust this observation isn’t new to any MintLife reader.

To a 7-year-old, however, it’s all new. That’s what’s great about being a seven-year-old. So when Iris decided last week that she wants to save up for her own iPod Touch, she asked if she could start a second account and split her allowance in half, $1 to the Burton Bank, $1 to the iPod fund.

“You bet,” I said, and we set it up.

I didn’t say that I have no idea why she wants her own iPod, because I let her play with mine too often as it is. Probably she has the idea that if she had her own, she could play video games instead of doing her homework, and we couldn’t stop her because it would be her iPod. I smell another life lesson coming on.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.