The Allowance Experiment, Completed!

By The Banker | Blog Posts, Personal Finance
20 Nov 2013
  • Sumo

bank of dadLast night completed Day 30 of the “Allowance Experiment,” in which I offered my eldest daughter a daily payment calculated as 10% of her allowance savings, compounding daily.  On day 1, she began with an initial grub stake of $1.  She received $0.10 on day 2 (10% of $1) and $0.11 on day 3 (10% of $1.10), and so on.

By Day 30, however, due to the magic of compounding, the daily payment grew to a substantial $1.44.  At the end of 30 days, she had $15.86 in the money jar.  That’s a pretty good sum for an 8 year old, because she can buy any ice cream her little heart desires, and $15.86 is also approximately 1/1000th of the way to obtaining an American Girl Doll.[1]

With this kind of experiment, one must stop after about a month.  Otherwise – because compound interest turns money into kudzu crossed with HGH crossed with a mutant Godzilla[2] – by 6 months of this I would end up paying her $2.1 million per day, and she would have over $25 million in her jar.  At which point obviously I’d be asking her for a daily allowance.

Plus with $25 million in the bank she could afford to purchase approximately 2 American Girl Dolls at the same time.[3]

Unexpected benefits

As I wrote before, one of the beneficial side effects of the allowance experiment – because I required her to do the daily interim calculations of 10%, plus adding up the totals in the jar – was appropriately difficult math for a 3rd grader.  This is smart parenting.

If her math errors worked in my favor, well that's just good banking practice

If her math errors worked in my favor, well that’s just good banking practice

You know what else is smart parenting?  When she messed up the calculations.  For example, when the 10% number she calculated ended up larger than it should have been, I immediately pointed out her error and asked her to try again.  I was not about to pay any more than I had to.

But what about when she messed up the calculations and it worked in my favor?  What about when she asked me to pay less in compound interest than I should?

Well, let me just say that all’s fair in love, war, banking, and parenting.  I mean, you can take the Dad out of Goldman Sachs, but you can’t expect to take Goldman Sachs out of the Dad, now can you?

Plus, as (my guide to all good parenting practices) Jack Handey points out, kids like to be tricked.[4]

The main point, accomplished

All jokes aside, the point of this experiment was not so much to induce savings or to teach basic math, but to viscerally illustrate the powerful force of compound interest.

I asked her if she understood the way in which money grew at an accelerating pace with regular 10% compounding.  She responded with a wide-eyed, “Yes, it gets really big.”

Good girl, my work is done here.

Please see related posts:

Daddy Can I have an Allowance?

The Allowance Experiment Gets Better

Daughter’s First Stock Investment

Book Review of Andrew Tobias’ The Only Investment Guide You’ll Ever Need

 


[1] That last number is just a price estimate based on gut feeling.  I haven’t looked it up.

[2] “Kudzu crossed with HGH crossed with a mutant Godzilla” is the name of my new favorite funk band.  Also, I’m going to copyright it as a title for my book on compound interest, so don’t even think of copying it.

[3] Again, all prices are just estimates.

[4] From the parenting guru himself: ‘One thing kids like is to be tricked.  For instance, I was going to take my little nephew to Disneyland, but instead I drove him to an old burned-out warehouse.  “Oh, no,” I said.   “Disneyland burned down.”  He cried and cried, but I think that deep down, he though it was a pretty good joke.  I started to drive over to the real Disneyland, but it was getting pretty late.’

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One Comment

  1. Kurei says:

    Maybe you can let your kid watch these.

    http://www.smckids.com/episodes/

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