Do You Pay Your Child Any Interest?

[Singuy]

I was thinking the other day...perhaps the best way to teach a child to save is to pay them interest as you act as their "bank". Perhaps give them a 3-5% return on their money compounded monthly so they choose to save their allowance/money earned/money from relatives.

I'm not sure if any of you guys do this. If you do, is it effective?

[disneysteve]

My daughter's first "bank account" was with the Bank of Dad. Her account paid 5% interest per month (not per year). I wanted it to accrue at a fast enough rate for her to see it even with a small balance so that she would understand the concept of compounding. I printed up a ledger for her to use and I updated it each month with her interest and any time she added or subtracted money.

Did it help? I think so. She's 21 now. She has a Roth that she opened at 17. She has an account with Ally and got excited the other day when she discovered that the rate had gone up. She turned out okay.

[msomnipotent]

My daughter gets $20 a month directed into her online banking account every month for her chores, so she can see the power her .5% interest (or whatever they give minors) gets her. I wouldn't personally pay her interest, though. I don't like keeping money around the house and I would lose track of a ledger or even lose the whole ledger, so everything goes directly into her savings account or her college accounts.

[disneysteve]

I wouldn't personally pay her interest, though. I don't like keeping money around the house and I would lose track of a ledger or even lose the whole ledger

I didn't need to have money to pay her interest. I wasn't giving it to her in cash. I was doing it as an entry in the ledger.

We did use a physical paper ledger but it could just as well have been a computer document, so you couldn't lose that.

[phantom]

My daughter gets $20 a month directed into her online banking account every month for her chores, so she can see the power her .5% interest (or whatever they give minors) gets her.

All kids are obviously different, but for me, the interest from the bank was enough to get me excited about interest. Even though I was just earning pennies, it was pennies for doing nothing more than not spending my money, and I thought that was awesome.

My own daughter is still a little too young for interest. Her money is sitting in the bank and earning some. But, she's still working on understanding numbers bigger than 3 and only vaguely knows that we use money to buy stuff.