Talk in the Nangle household has turned to interest rates cuts. Specifically, the prospect of rate cuts from the ‘Bank’ I run for my kids on which I pay 10% per week that I have previously described here.
As I’ve explained, I founded the Bank as a way to combat the weekly pocket money flush where money *had* to be spent on *something, ANYTHING!*. This behaviour was then followed by complaints that they could never afford things that they might actually want. Giving them APRs on balances that are enjoyed by only the more dubious loan sharks did the trick.
Those of you older than 10 will have spotted immediately the flaw in the initial design – that the Bank is a redistribution mechanism from me to them that rewards saving to such an extreme extent that it could quickly cause it (and me with it) to go bankrupt. By being the Bank, I am borrowing wonga from my kids at outrageous rates.
For this reason I was particularly careful to spend a good deal of time at the inception of the Bank talking to the kids about how the rate would be set weekly and could be changed at my discretion. I even raised the possibility of negative rates at some point in the future, which drew cries of disbelief and outrage from my 8 year old.
Fast forward a year and it’s rate cut time. Why? Because, basically, my 6 year old gets it. From his 60 pence a week pocket money he has, with the help of compound interest, amassed a fortune of £50, giving him an unearned income of £5 per week and rising that he sinks back into the Bank. My 8 year old meanwhile has maintained both a balance of between £2-15, and a healthy scepticism of the value of saving for its own sake – preferring to save for something specific, buying it, then starting again.
My 6 year old looks at my 8 year old and wonders why she doesn’t save more. My 8 year old looks at my 6 year old and wonders why he values the abstraction of a ledger entry over all the stuff she has actually bought. Differing perspectives, both valid. I am very proud of them both.
My sky high APR has crushed the kids’ aggregate demand and on my son’s current trajectory, he will soon own the house. Yes, the Bank has embedded a useful lesson about how it *might* be useful to defer consumption. But, the house. Something must be done, and it’s name is financial repression.
The motivation to cut rates comes from a desire on my part to deleverage, or at least ease the pace of leverage growth to which my children are willing counterparties. But with such different marginal propensities to consume, should I cut the Bank rate or introduce a tiered set of rates that preserves high rates of interest on small balances, is less generous to larger balances, and penalises hoarding?
I worried that a tiered rate regime might be too complicated and could incentivise odd behaviour so I asked my 8 year old what she would do if marginal rates sloped downwards and went negative from £40 out. I had expected her to say that she would keep excesses in piggy bank cash. But her answer was intriguing and, if the ING survey is to be believed, specifically Anglo-Saxon:
‘I would get mummy to start a second bank with a positive interest rate and put the extra money in that instead’.
At the end of the original pocket money blog I reflected that what I had created was less a Bank and more a defined contribution pension system. Perhaps the logical next step is to take a leaf out of Osborne’s book and introduce a Lifetime ISA to compete with the current system. But for now, we have opted for a tiered rate regime which is far from perfect. It does serve to reduce my risks, and remains more generous than anything else around.
Amount of contributions required to save a balance of £100