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I've mentioned a few times on this blog that my six-year-old daughter had fallen victim to the claw machine at Walmart. I've agonized over her willingness to throw dollar after dollar of her allowance money at a box that never gives anything in return. I've scoured for answers on how to tear her away from the toy-stuffed vice while still respecting her freedom. Now I am proud to say that I may finally have found a solution.
The trick was to add an interest rate to whatever allowance my daughter saved from the week before. The rate had to be large enough that she would see the benefit of letting it work over the course of a short time. Christina and I started the interest rate at 10%.
Initially, our daughter saw such a meager return that she was disappointed by the small amount. Since her allowance is $3 weekly (50¢ for each year of her age), her first return was 30¢. Or, rather, it would have been 30¢ had she saved her previous $3. I think she only made 2¢ in interest.
But then the magic happened. She noticed that her older brothers received a greater return because they had more money from the week before. She's as competitive as any child I know and, accordingly, made saving money for the following week top priority. The return was enough that she recognized the game of it all.
Now she's got enough saved up that we're starting to reduce the interest rate gradually. A 10% weekly interest rate is more generous than we can afford. In fact, if she were to save her money for a full year on a $3 weekly allowance, she would have close to $4,000. That's more than any six-year-old child should have free reign over. Another year at that rate and we'd have to turn the home, the cars, and our livelihood over to her ownership. She would discover that the true beauty of compound interest is that her parents, having ceded control, no longer have any meaningful authority.
Fortunately, she has her sights set on some sort of My Little Pony palace. Crisis averted. Honestly, that palace is pretty cool, and I can see how it might be more appealing than dominion over our household and belongings. Buying it will give her a sense of empowerment and a better understanding of how a little patience brings greater returns over time.
Speaking of empowerment, having Leslie Greenman, author of Dating Our Money: A Women's Guide to Confidence With Money and Men, on the show was a real treat. She and I had a terrific conversation about how we can empower our daughters and how there's no reason little girls can't join in on the money conversation.
My little girl is evidence of how motivating those conversations can be. And now that we've hooked her in with an exceptional interest rate, it's time to start lowering it a bit for our own financial well-being.