In today’s blog post I will share a story from my recent book 5 Years to Freedom. The story of how I am helping my son understand the power of saving money.

A while ago, I was trying to devise an experiment to teach my son the value of saving money. He has a student bank account with a local institution, however with such low interest rates, it's impossible for him to actually see his money grow. If I can’t get him to physically see it grow, he won’t properly understand the value of saving long term. So I started using the idea of “the bank of dad”. I first learned about this concept from Mr. Money Mustache and decided to mimic his strategy with a more aggressive approach.

This strategy involves me (the parent) being the bank. My son gives me whatever money he wants to save in his bank, and I update a bank book that shows his money growing. I invest his money into our long-term accounts, which will generate much higher returns. I can then pay him more than his student high-interest savings account rate of 0.01% annually. Using this strategy, you obviously have to assume a bit of costs, since you will likely pay your child more interest, risk free, than you may earn. But it’s a small cost, considering they don’t have that much money to save to begin with and considering it will teach them valuable financial lessons.

I wanted my son to clearly see his money growing. At seven years old, that is difficult. So, I settled on a rate of 5% per week. This will sound like a crazy figure since it works out to a 260% annual return on investment. But I wanted him to profit by at least $1 if he saved his $20 bill one week to the next. This would be a great exercise in teaching delayed gratification as well. Instead of trying to explain percentages, we decided the interest would be set at $1 for every $20 in the bank account. Paid weekly on Fridays. I designed a small bank book similar to the ones traditional banks use, but where I can fill it in with a pencil.

He understands now that for every $20, he keeps invested in the Bank of Dad, he will earn an extra $1 every week. This has motivated him to look beyond small short term savings like $30 for a NERF gun and prompted him to aim with longer-term goals in mind. The other day he was at $84 in his bank book when he received $15 from a toy he decided to sell on Kijiji. His first instinct was to give it to me to put into his bank so that his $4/week interest would now go up to $5/week. I was very proud, not only of his ability to embrace delayed gratification but the quick math calculation he had to do to come up with this reasoning.

We started this experiment 6 months ago and it was a hit. He really embraces the idea of putting his money to work for him. My other children are little too young to fully understand this concept, but I think at 6 years old they will be ready for their own account with the Bank of Dad. As my son gets older I will be amending the rules to a more reasonable interest rate since he may eventually get to $1,000 in savings and it is unreasonable to pay him $50 a week in interest. But I will continue to keep a rate that teaches him the power of saving money long term. Right now the system works. Especially considering that he will likely buy a new bike or a new iPad with his savings (a couple of the ideas he has in mind right now) which are things we would probably help him pay for anyways.