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Online Allowance Q&A, Buying AAPL Slice by Slice, Buying Bonds: Weekly Family Finance Picks (#50)

We’re constantly scouring the Internet looking for articles related to family finances and teaching kids good personal finance habits. You can visit the FamZoo delicious page to see our ever growing list of family finance bookmarks. We’re up to 1610 now! Each week, we pick our favorite articles from the previous week and post them here.

This week’s picks kick off with some classic online allowance management Q&A followed by two interesting options for introducing kids to investment fundamentals.

New Technology Teaches Kids How to Save

Online Allowance Q&AFarnoosh’s article about online allowance trackers highlights one of FamZoo’s competitors and mentions two others in the body. There’s no mention of FamZoo. Ouch, that hurts!

So, why highlight this article in this week’s picks? Well, it stirred up a lot of interesting, pointed conversation in the comments. Wedged between juvenile assertions by the typical collection of Yahoo comment trolls were some very thoughtful questions and comments — ones that I encounter frequently when addressing the topic of online allowance and chore management. I jumped into the fray and added my two cents here and there. To spare you the tedium of wading through the troll clutter, I’ve embedded a recap of my interactions below.

Here’s a handy index of the questions covered. Just click on one to see the response, or scroll down to browse through them in sequence.

In her comments, “Mrsdarcy” raises the question: Should schools be in charge of teaching our kids financial literacy? My thoughts on the schools vs. parents financial literacy topic:

I applaud financial literacy efforts in schools as well, but I think that money and values are intimately intertwined and, as a result, parents should take an active role in mentoring their kids in this area — above and beyond whatever schools are (or are not) doing.

Several folks posted comments that amounted to the question: Can’t I just use real world savings accounts to teach my kids about money instead and save myself the $30/year fee typically charged by these new “virtual family bank” solutions? My response:

If you choose to go the real banking route with your younger kids (instead of the “virtual family bank” route offered by these sites), I’d recommend checking out ING Direct’s Kids Savings accounts — they make it easy to set up multiple accounts so you can do the splitting between spend/save/give/etc as desired. I think you’ll find the approach less flexible and convenient though with less emphasis on teaching personal finance basics to your kids (like budgeting, spend tracking, loans, family collaboration, chore tracking etc). That’s why I built FamZoo in the first place. If $30/year/family is too pricey, there are some free alternatives — typically with fewer features or a different business model (like affiliate links to Amazon products).

A fellow named “Bob” described a clever system he rolled out to his kids using accounts at Ally bank. It’s a really thoughtful comment and approach, so I’ll repeat it here:

We direct-deposit payment (allowance) each Friday for chores done. The amount is lowered if the chores are not completed; we also apply a small penalty if chore is not done on time. We use the Ally bank kid’s money market and savings accounts to separate the savings and spending (it is also paying 1%, which is better than most anything else). Each kid gets $12 per week, of which $2 must go into long-term savings and we match the $2. The remaining $10 is direct-deposited to the money-market account. They either have to use the ATM card and withdraw money to spend or do an electronic transfer to our account if they need money right away. They are also required to pay $15 per month for unlimited text messaging and insurance on the phones.

We do encourage them to save at least 25% of gift money; however, if they have a purchase in mind, we will by-pass that, as long as it is reasonable.

The net effect of this is that over the last two years, each kid (12 & 13), have saved $500+ and think about their spending when they have to dip into that account or as the 12 year old puts it “wasting” her money.

Since the remaining $25 per month does not go very far, we do not require them to pay for all extra-curricular activities, but during school breaks when they want to do something every waking moment, we may pay for one night of skating or swimming, etc, but other activities are paid by them. Or when shopping and they just have to have something, then we dip into their funds.

Don’t know if it is the perfect scenario, but we have seen nights out being forgone so they could save for the i-touch. We have also seen them ask for extra chores to make extra money to go somewhere or to save for a bigger purchase.

My comment to Bob effectively answered the question: How do I use a virtual family bank in conjunction with real world savings and investment accounts?

Bob - that’s a great system. Kudos. One thing about banks is the (semi) hidden fees. Ally is pretty up front about them. For example, at Ally, once you exceed 6 transactions per “statement cycle” (I assume that’s per month), you get hit with a $10 fee per transaction. Might not take long to exceed $30 bucks at that rate. Here’s their page: http://www.ally.com/bank/online-savings-account/fees.html Lots of our customers just use the virtual accounts as temp holding buckets and roll the virtual funds over to real world saving/investing accounts when they reach a critical mass. They use a virtual account for general spending to avoid per-transaction fees and to assess their kids for shared stuff like their share of cell phone plans/insurance. It’s basically just a convenient family accounting system.

A reader named “Sun” effectively asked the question: Why not just stuff money in envelopes — one for savings, one for giving, and one for spending/fun? My thoughts:

Sun — yep, envelopes can work just fine. That said, lots of folks just like the whole online/mobile convenience and associated teaching tools of an online virtual bank, not to mention avoiding the hassle of keeping physical money lying around in denominations that’s easy to divvy up into envelopes or piggy banks.

Lots of folks chimed in with comments about how spoiled and lazy kids are these days and how they had to work for every penny they ever earned, walk 100 miles to school in below zero temperatures, etc. (Ok, I’m making that last part up.) Bottom line: we were debating the classic kids and money question: Do allowances spoil kids? My two cents on that classic:

“Allowance” is such a hot button word because many immediately equate it with “entitlement.” I prefer to think of it as a budget instead. (1) Work out a budget with your child for something you’re already purchasing on their behalf — like clothing (2) Give them an allowance that matches that budget (3) Turn the purchasing responsibility over to them for those items (4) Have them track their spending and stay within budget. It’s a great personal finance learning experience and you’ll probably end up spending less overall. Win/win.

Allowance can be a pretty emotional, passionate topic for many. So, for those firmly in the anti-allowance camp, the implied assertion/question became: Allowances are evil, so why would I use an online virtual family bank? My response:

There’s no requirement to give unconditional allowance — that’s your choice — you can go the unconditional allowance-as-a-teaching-tool route, the Dave Ramsey commission-for-chores route, the only-checks-from-grandma-and-outside-jobs route, or some mixture thereof. It’s your bank, your rules.

Denise wrote in her comment:

When you don’t give the kid the cash it removes his ablity to make choices, or learn to budget for himself, you are doing it for him with the IOU. I wonder how he takes the $500 out of his virtual account when he wants to buy skateboard?

The idea of a virtual family bank is a little tricky to communicate, so it’s not uncommon to hear misperceptions like the ones expressed above by Denise. Her comment really maps to the question: How does a virtual family bank work? My explanation:

Denise, from a kids perspective, the online virtual family bank is just like a real online bank. Real banks effectively hold IOUs too. When your kid earns $20 from babysitting (or whatever), they hand the money over to you the parent. You credit their virtual account(s) with $20 and handle the real money however you like. Over time, when your child builds up enough to make that purchase (say the skateboard), you the parent make the purchase on their behalf however you normally do (cash, credit card, debit card, paypal whatever) and then debit their virtual account accordingly. The child must still make choices and can only spend up to the balance in their virtual account (which they can check online just like adults do in the real world).

It works just like the real world, but the parents run the bank/ATM and make the rules. It’s a warm-up for the online banking your kids will be dealing with in the future, but presumably its a more nurturing, educational environment where practicing and making the inevitable mistakes has less severe repercussions than in the real banking industry.

And finally, let’s address the most popular troll comment which basically equated to: These sites are a scam. Isn’t anyone who pays $30 a month for an online virtual bank an f’n idiot? My response:

To call these online virtual family banks a scam is goofy. There’s nothing fraudulent here. Parents are paying a very clear, well defined fee for an online teaching tool. (In fact, the fees are way less hidden than they are for real world checking/savings accounts!) It’s like buying any other educational product like, say, a book. As in the book case, there are ways to get similar info for free — e.g., you could surf the web and gather equivalent info yourself for free — but you might find the book to be more convenient or packaged in a way you like. Same thing here. There are paid subscription services in this area, ad supported free services, and alternate ways to teach the same lessons altogether. Pick the one you like and the one you think has the best chance of getting you to consistently follow through on the real important parenting goal here: teaching your kids the personal finance habits they’ll need to thrive in the real world. Fair enough to propose alternate approaches to reaching the same goal, but to label honest businesses as a scam because they charge a well advertised fee seems rather trollish.

Stock too Pricey? Try Partial Shares.

I like the idea of buying a very small holding in a familiar stock as a way to teach kids about the basic concepts of investing in companies. It’s a concrete way for your child to experience the potential rewards and — perhaps most importantly — the risks involved. (Make sure you’re prepared to lose money!). The problem is: many of the companies most familiar to kids — Apple, Google, Amazon, Netflix — have mighty hefty share prices. As of closing bell today, the prices of each are: AAPL $331.49, GOOG $516.73, AMZN $189.68, NFLX $262.57.

That’s why Emily’s article caught my eye. There’s a way to buy Apple one modest slice at a time using sites like Sharebuilder. You’ll want to scrutinize the per-trade and sale fees, but it sounds like an attractive approach as a real-world learning tool. Read more about it in Emily’s article here. I found another article with a bit more detail on how it works with Sharebuilder here.

If you find the fees for each of the individual partial share acquisitions unappealing, you might consider using a FamZoo virtual account to gradually accumulate the price of a full share. For example, you could create an account named "Stock Purchase" and divert a portion of your child’s weekly allowance into it. Your child could track progress toward the ultimate stock purchase using a savings goal equal to the stock price (which you can update from time to time). Once the goal is reached, you can purchase the share with a single transaction and minimize trading fees.


by U.S. Department of the Treasury Bureau of the Public Debt

Like I said above, investing in individual stocks is very risky, and you better be prepared to lose money. That sentiment was immediately reinforced in the reader comments on the previous article. As a reader named Frank points out:

Sorry to throw cold water on this, but individual stocks are not a good way for people to be investing $25 per month. 99% of people with $25 or $50 per month to invest would be better buying US savings bonds from TreasuryDirect. It's not very glamorous and it may only earn 3%, but it is safe.

So to balance out the investing lesson for your children and introduce them to options at the other end of the risk/reward spectrum, you may want to head on over to TreasuryDirect. They have a nice section for kids that explains the basics of US Treasury Securities here. It’s great for adults too — at least I learned a lot! There's also a video that shows how to open up an account and make purchases online here.

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