How Do We Like This Idea for Teaching People to Save Money?

A reader named Philip Serghini writes in:

Great podcast about financial literacy and clean hands.   I’ll try to refrain from sending hate mail to the attorney who espoused not teaching kids about it.   

It would be an interesting experiment if (in, say, Buffalo) every kid entering the first grade were given a $100 savings deposit (paid for by a private foundation). They wouldn’t be allowed to withdraw the money at any time up until they graduate, but they’d be able to add if they wanted.  Each grade they ascended, another $100 would be added.  If you dropped out or failed out, you’d forfeit everything (except anything you’d voluntarily put in). By the time they graduated from high school, each student would have saved a nice tidy sum to spend as they please: college, car, suit.   

Who knows, the kids might even garner a better appreciation for math because of its direct applicability to their savings account. Some kids might be incentivized not to drop out.   Others may have learned such an important lesson about savings, interest, and the value of starting to save early they they just keep their savings account open and active after they graduate.

Okay, assuming you can find a willing “private foundation” to put up the dough, what’s to not like about this proposal? I do feel I’ve heard of similar experiments — and of course we’ve all heard about those free-college-tuition plans for kids who graduate high school — but I don’t know if something this simple has ever been tried with an eye toward linking financial literacy and education. Thoughts?

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  1. Aleix Pedragosa says:

    It would be far more interesting if:

    a) From the second grade, instead of giving the kids $100, they were given the same amount kept in the savings account (or a %).

    b) To collect the full amount they should graduate.

    I will try it with my kids!

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  2. Ally says:

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  3. Julie says:

    It’s an interesting idea, but keep in mind that the prefrontal cortexes of children — the area that deals with long-term planning and consequences — isn’t fully developed until their 20s. I doubt that a 9-year-old will be motivated by the idea that he’ll get some money when he’s 18 — that’s his entire lifetime away! And a struggling 16-year-old *may* hold out another two years for that extra money, but it’s probably not what they’re thinking about when they chose to engage in risky sex or drug habits.

    I like the idea of teaching kids financial literacy, and I think this is an interesting idea. I’m just not certain it’s going to have quite the huge benefits laid out by Serghini.

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    • Pshrnk says:

      While their brains are not fully developed there are many youngsters capable of long term planning. Such a program coupled with other shorter term motivators would have excellent results. There is a reason why the human brain takes so long to be “fully developed”….Plasticity is beneficial. Take advantage of the more moldable brain while you can rather than not trying at ages where there is the greatest potential.

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    • Chris W says:

      Julie, I think there’s a big difference between “fully developed” and “completely deficient.” Plenty of kids I know were saving money way before they got into their 20s, of their own volition. (And they were also choosing not having risky sex, taking drugs, etc. for reasons other than a moral code.)

      The stimulation of the reward ($100 per year) would also help provide short-term perks in the meantime, via a “point” system if nothing else.

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  4. Enter your name... says:

    This doesn’t really seem to be the kind of financial literacy that most people need. It’s not even the kind of delayed-gratification skills that people need to develop. For the majority of students, this is “I don’t have to do anything different at all, and then they give me a huge, free prize.”

    If you want to teach kids to save their money, then they have to actually make the choice to save money that they don’t have to save. They have to make the choice to put the $10 in the bank and leave it there instead of taking the $10 to the store and buying candy.

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    • Mike says:

      Exactly. This just encourages kids to stay in school. Giving them money doesn’t teach them anything about how to save it on their own or the power of interest.

      I think a much better effort would be to focus on increasing usage rates of checking accounts. In lower income areas, they are still surprisingly underused. People without checking accounts are already paying a check cashing fee, and then they have all their money sitting around in cash, which is much harder to save.

      Give kids (starting at age 16-18) a checking account with $25 in it, and continue to place a small amount of money in it every year as long as the account is saved.

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  5. Joe says:

    This is a good idea and most of the points raised are valid. But the kids aren’t really “saving” since it isn’t their money to start. Maybe a better way to do this would be to offer high schoolers huge interest rates on a special savings accounts, say 20% (funded through private donations). That way the kids would be old enough to save their own money and the value of saving/compound interest would be tied to their effort personal. This would also be a lot cheaper and therefore, feasible.

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  6. PoliticalHack says:

    I live in Wake County, NC, which has a very large enrollment – almost 150,000 students. This proposal would cost $15 million per year. That would be one mighty nice private foundation that would give away $15mm…

    I like the idea, and it would be a wonderful learning opportunity for the students. But I keep going back to the $15mm…

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  7. danny says:

    they could just turn savings into a game, the way foursquare turned ‘checking in’ into a game. maybe students could earn badges for good grades, and they could either redeem badges for right to withdraw x-amount of money or maybe extra money deposited into the account.

    they could do car sales tricks like “for saving x-amount you get y-amount cash back!”

    the problem really is who is going to pony up this kind of money to kids? someone page Roland Fryer already.

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  8. Jack Skellington, ESQ says:

    Hi, Ally,

    —-If you want to teach kids to save their money, then they have to actually make the choice to save money that they don’t have to save. They have to make the choice to put the $10 in the bank and leave it there instead of taking the $10 to the store and buying candy.—-

    Interesting point. It does sort of immediately beg the question, though, doesn’t it? The way to teach kids to save money instead of spending it is by giving them the option so spend and then rewarding the children who save? Doesn’t seem to teach the children who spend and don’t receive the reward very much, does it?

    Beyond that, allowing children to access the funds prior to graduation asks them to make complicated decisions, they aren’t capable of making. There are valid biological reasons we don’t allow people younger than a certain age to enter into contracts or to consent to certain activities, etc. Asking a 6 year old not to buy a toy now because they’ll have more money in 12 years is silly and ludicrously weighted towards them failing. Most of them can’t wait 15 minutes for the extra marshmallow.

    —-It’s an interesting idea, but keep in mind that the prefrontal cortexes of children — the area that deals with long-term planning and consequences — isn’t fully developed until their 20s. I doubt that a 9-year-old will be motivated by the idea that he’ll get some money when he’s 18 — that’s his entire lifetime away! And a struggling 16-year-old *may* hold out another two years for that extra money, but it’s probably not what they’re thinking about when they chose to engage in risky sex or drug habits.—-

    Hi, Julie.

    I think you’re right about the biological aspect. I also think you’re missing the point of the cumulative deposits. Since the children can’t access the “seed” money until they graduate, and since 7 year olds rarely drop out of school, the cumulative increase “scales” appropriately with the child’s reasoning ability, being the most potent when they are most able to understand the impact. Also could prevent “carpetbagging” by parents moving 16 year olds to a school where there’s a “graduation” bonus, etc.

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    • Ally says:

      Jack,

      “Doesn’t seem to teach the children who spend and don’t receive the reward very much, does it?”. That’s the way real life works though. Adults are free to spend, save or burn their money. Also, it ignores the benefit in kind that the child who spends will receive from spending. After all, children rarely buy anything that they won’t get pleasure from, in some form or another. This surely needs to be weighed against any future benefit of saving. I’m not saying that children should be taught to spend, just that there any benefits to saving need to be balanced with the benefit of spending.

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      • Jack Skellington, ESQ says:

        Hi, Ally:

        —-“Doesn’t seem to teach the children who spend and don’t receive the reward very much, does it?”. That’s the way real life works though. Adults are free to spend, save or burn their money.—-

        Sure. In “real life” adults are allowed to put themselves at risk in many ways that we’d shield children from. Letting a child decide to spend or save money at 6 years old seems about as useful as allowing them to decide to start smoking or not at 6 years old. There’s an absolutist position on the side of personal liberty at birth, but I don’t really think that’s an argument you’re making. Or is it?

        Also the entire goal of the process that leads to money being deposited at all is to educate children. How would this accomplish that?

        —-Also, it ignores the benefit in kind that the child who spends will receive from spending. After all, children rarely buy anything that they won’t get pleasure from, in some form or another. This surely needs to be weighed against any future benefit of saving. I’m not saying that children should be taught to spend, just that there any benefits to saving need to be balanced with the benefit of spending.—-

        Due respect, it’s difficult to ignore something so entirely off topic, but YES, I am actively choosing to ignore the utilitarian impact of a 6 year old choosing to spend money and how much it increases overall happiness.

        I’m also ignoring the Marxist argument that providing children money without tying it to work pushes them towards the petite bourgeoisie and a life of quiet desperation.

        As well, I’ve chosen to ignore the inherent inequality of giving one school of children an incentive to graduate while other schools have none.

        Additionally, I’ve chosen to not address the children who may starve to death because resources that may have been used to feed them were instead allocated to financial education.

        You get the idea.

        Let’s stipulate that getting children to spend money is less challenging than getting them to save money, and that increasing drop out rates in public schools is likely easier than decreasing them and assume the goal is to work towards saving and graduation.

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      • Ally says:

        Hi Jack,

        Fair enough, my ‘real world’ point may be wrong, however my point about the benefits of a 6 year old’s spending can’t be off-topic as it was in response to your comment “Doesn’t seem to teach the children who spend and don’t receive the reward very much.” It’s not a utilitarian view, it’s simply that I believe that there are clear beneficial lessons that a child could gain from spending. They could begin to learn the value of money, which is more important than the subjective value of an item. A child could learn that if they buy something nice, albeit chocolate or a toy, that money is needed for that purchase. It could teach them that if they work hard in school, go to college and work hard in employment, that they will have a better chance of having that money to buy those nice things.

        “assume the goal is to work towards saving and graduation.” – I agree, however there is more than one way to achieve this. I believe that learning the value of money through spending is one of them.

        On a side note, I’m a 35 yr old Brit and this is the first time I’ve been on here, so thanks for making it really interesting for me!

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