So following a general EconFinance Twitter exchange over the weekend about rules of thumb for kids pocket money, @drlangtry_girl sent me this Slate column on the subject. The column advocates giving kids somewhat more ($1 per year of age from pre-school inflating meaningfully) than I miserly offer my kids. The interesting bit to me is its advice to force an equal three-way split between spending, saving and giving as this would encourage kids to think about and engaging with money in a mature way. Getting people to think about money is a laudable aim.
For what it’s worth, I thought I would set out the Nangle household arrangement.
Judging by my peers’ arrangements, I don’t give my kids much (10p per year of age starting at age 5 – so a five yr old gets 50p per week, a six yr old gets 60p etc). What do I hope to achieve by giving my children any pocket money at all? Probably some familiarity with extremely basic budgeting decisions, some of which involve judging instant gratification against deferred gratification (spend 50p to buy sweets today vs save for 12 weeks to buy a watch in a museum gift shop, to take a recent example).
Why might I want to encourage an ability to save in my children? I just think this a useful thing for someone to learn to do. There might be some echo of the Stamford Marshmallow experiment, or more likely a older understanding of its conclusions, that is ricocheting across popular culture framing my approach.
Furthermore, some academics suggest that giving pocket money and encouraging saving can have a discernible impact on later lifetime savings rates. And while John Eatwell is right that from a macroeconomic perspective it doesn’t matter how pensions are financed (either state transfers from workers to pensioners, or the accrual of monetary claims by pensioners on current workers), I still have a lingering suspicion that a system in which claims are intermediated via financial markets would dominate an entirely state-intermediated system when it comes to associated trend growth rates. So I’m comfortable encouraging them into higher savings patterns (and trust the state to generate large fiscal deficits if required to balance the economy).
However, the problem is that children in general, and my children specifically, tend to have pretty high internal rate of return (IRR) hurdles: a chocolate today is certainly worth a lot more than a chocolate in a year’s time to them. It’s as though the whole Swiss National Bank move to negative rates just passed them by. In fact, a ‘game’ that you might play with your kids is uncovering their IRRs by asking them how they would prefer a chocolate today or two/ three chocolates tomorrow/ next week etc. I have found that IRRs reduce exponentially with age, but are still mighty high.
So going back to the real life saving-up trade-off: a £6 gift shop watch has got to be worth a LOT more to them than twelve 50p packs of sweets if my children are going to delay gratification for twelve whole weeks. And so my providing such miserly levels of pocket money could be counterproductive, discouraging saving.
A few months ago, in order to address this issue, I invented a bank (or rather, a ledger). I currently offer my kids 10% interest per week on pocket money deposits (rate fully adjustable). This is far below my estimate of their IRRs, but it has big novelty value and the compound interest thing is pretty amazing for them to witness. The catch is that any money that goes ‘into’ the bank cannot be spent on sweet stuff. So the ledger looks a bit more like an unregulated Defined Contribution pension scheme with a lot of concentrated counterparty risk than a bank. That is to say it is a fiscally-subsidised monetary claim that can be accessed only to purchase assets approved by the fiscal authority (me). I thought about whether I should remove the requirement not to purchase sweets come April 6 but think I’ll let the government beta-test that approach before rolling it out in my household.
I’m not sure I’ve got the right system in place yet, but it does facilitate good conversations about money (and the nature of money). I do worry that the real lesson I am giving my kids is that r>g, which was not what I set out to do at all.
But in its defence I would say three things:
1. My kids have used the bank a fair amount to build up sums of c.£5-6, which entails a good deal of delayed gratification. This is far better than the pre-bank days.
2. While the notion of giving interest on deposits might seem pretty dated, I am hoping that it prepares my kids well when they consider taking on debt in later life (eg an understanding that compound interest works both ways).
3. When I put it to my 7yo this evening whether she would prefer the Slate system that would give her an immediate income boost but require the abolition of the bank, she is really in two minds about it.