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I don’t want to brag but my daughter is one smart cookie.
You see, although her dad is smart enough to use savings rate arbitrage to take advantage of online savings rates versus rates found at brick and mortar places, my daughter took it to another level.
Her bank of choice is super convenient and, on top of that, its interest rates blow everything else out of the water.
I am speaking of course of, “The Bank Of Daddy.”
I credit Physician on FIRE for inspiring me with his post, “Teach Your Kids About Money With The Bank Of Mom And Dad.”
I have always encouraged my daughter to save.
To be honest, she was doing fairly well without any additional monetary incentives needed.
But I really wanted to drive home the point of how compound interest is truly a remarkable weapon in her financial armamentarium.
Unfortunately there were two issues that made things difficult:
- My bank required that a child had to be 16 years old with valid ID to open a savings account.
- With the current interest rate environment being so low (0.05% for brick and mortar and 1.8% online), any interest on her balance she would receive would barely register a yawn for her.
So when I read Physician On FIRE’s article about how he created a spreadsheet for his children and essentially took the role of the bank, I knew I had to enact a similar structure for my daughter.
I wanted to create something similar to how real banks treat savings accounts and therefore researched the best way to create a spreadsheet to mimic their practices.
My online bank calculates interest accrued by assessing daily balances.
Instead of having the balance at the end of the month determine how much interest is paid, the interest accrued truly reflects how much money was in play at any given time.
This was therefore how I wanted to design my daughter’s “Bank.”
Building Your Bank:
Now I am certainly no expert in Microsoft Excel, and this will not be mistaken for a masterclass in any sense of the word, but I thought I would share what I came up with so that you might implement a similar spreadsheet for your own family and create your own “Bank.”
I think it is best to first show you the finished product:
A 12% interest rate! Have you lost your mind, Xrayvsn?!?!?!
Yeah, I know, I know.
So why did I choose 12%?
Well given what little remaining time my daughter has under my roof (she just turned 14) and the fact that I wanted to really highlight the beauty of compound interest so that it can be ingrained into her financial psyche, I wanted to choose an interest rate high enough to make a meaningful impact on her end balance.
That interest rate also happens to coincide with the rate of return Dave Ramsey uses in his financial examples.
Formatting Excel Cells:
In order for this to work, it is very important that Column A Cells be formatted under the “Date” Category.
Using the same methodology, Column B should be formatted under “General” and Columns C-F under “Currency.”
The interest rate cell (H1) should be formatted under “Percentage.”
Entering Data And The Formulas:
Fill out Column A and B with the date and whatever transactional event occurred.
For my very first entry (row 3), I manually inputted all the values shown.
Every subsequent row will then be filled automatically according to the formulas assigned to the specific cell which I will elaborate below:
The subsequent starting balances (Column D) for each row will be calculated according to this formula (=F3+C4):
You will only have to manually enter this formula once and any value below in this column can automatically be filled in by using a trick that will be demonstrated later.
Column E is where the magic begins, as it will calculate whatever interest rate you decide on (H1) for the daily balance in the account with the following formula (=F3*((A4-A3)/365)*(H$1)):
Column F, or the Ending Balance, is pretty straightforward using the following formula (=D4+E4):
Remember above when I said you only have to enter the formulas for the 2nd row (Row4 in my example) and it can then be extrapolated to any data below?
I am sure there are a lot of people who already know the following trick but I will share it so everyone is on the same page.
For every new entry, you will have to manually input the data for column A, B, and C.
The values for columns D, E, and F will be instantly calculated if you do the following:
After you manually input the 1st three columns of data, go to the row above in the 4th column (D) and click on it.
It will now have a green frame around it and in the bottom right corner there will be a small green square (arrow pointing in above example).
Bring your cursor to that green square (it will change to a crosshair) and then drag it down to the cell below.
The new calculated value will automatically populate that cell.
Repeat this process for columns E and F.
Your Family Bank is now open for business.
The Impact Of Having The Bank Of Daddy Open For Business:
It took me quite a long time for me to come up with the above spreadsheet and formula, piecing tidbits from various sources on the internet and tweaking it for my particular wants.
When I first told my daughter about me trying to create a “virtual bank” with a spreadsheet, the sound of silence was almost deafening.
You could hear crickets chirping in the distance as she really had no clue what I was trying to accomplish or that this was all for her benefit.
[I do believe she did mutter, “you are such a nerd,” at one point though.]
I finally got the Bank Of Daddy fully functioning and was then able to show her the magic of compound interest first hand.
I showed her the amount of interest already accumulated for the money she had not spent.
That is when I could see it all sink in, as her mouth started dropping and that “light bulb, aha! moment” occurred.
I could see the wheels and gears turning in her head as she realized the potential financial impact it had with her money.
I even further emphasized the beauty of compound interest by showing her what her ending balance could be on a given date (such as the test in my example).
That’s when I knew I had her, and that she might have indeed been bitten by the savings bug.
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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Pretty cool way to teach her about investing and compound interest. Although if you give her 12% she might start believing the myth that Dave Ramsey propagates that you can get that from the market over time too 🙂
I agree I may have gone overboard with the 12% interest rate (and it is easy to change by anyone copying it for their own use) but figured if I gave her the interest rate I was receiving at my savings account (1.8%) it would barely register a yawn for her.
Hopefully I don’t get killed with how much interest I end up owing her by the time she hits college. Lol ?
Very cool thing to do for your daughter– and your spreadsheet is more precise and user-friendly than mine. You’re giving me spreadsheet envy!
Trust me you have inspired me far more with your content and spreadsheets than this post could ever do. Thanks for inspiring me with the post I referenced above. It set in motion the creation of my daughter’s bank so she owes you a debt of gratitude too
You’re a very generous dad. I had kids open their own bank account. Luckily- they can open at age 13. They also have summer jobs as camp counselors so I opened up Roth IRA as soon as they get W-2s. Keep up the good work with the blogs and enjoy the holidays with family& friends!
Thanks Ming for dropping by and commenting. I always thought kids could open a bank account at age 13 too, but then found out if I wanted to do that, they really wanted it to be part of my account and not her own.
Very smart idea about getting Roth IRAs for your kids. With decades of growth, small sums will have a significant impact when it is time for them to retire. Best of the holidays to you and your family as well 🙂
Congrats XRV! I think 12% is worth it if it gets her interested in compounding and understanding money at a young age. Good Job!
Thanks VP 🙂
I do definitely think the interest she has been earning has motivated her to keep saving. Now I just have to find a bank that gives me the same return and I’m set. LOL.
Have a great day and wish you the best for the upcoming holidays.
I’m trying to instill in my kids the virtue of saving and investing as well. I like the idea of giving an interest rate amount that is impactful enough to be noticed.
When do you think it is a good time to also teach them about various types of investments such as listed equity, real estate and fixed income products?
I think it’s going to have to be something that you have to sort of gauge their interest in. If you start talking finance and their eyes glaze over might be a bit too early. I started talking about passive income with my daughter when she was about 12. Told her that my goal was to take some of the money I earned as a physician and create capital that will eventually pay me back so I can rely on that. I spoke to her around 10 about how appearances of wealth are not always the truth as people could… Read more »
Congratulations on 250 posts my friend. I cannot believe we both have made it nearly two years already. February 8 I will reach two years blogging and I can honestly say I have never thought of stopping once. Guess I have really found my passion. By the way I love that you did this for your daughter and I hope she is wise and follows in her fathers footsteps in what you have learned about managing money. I am starting Jasmine’s bank account hopefully for Christmas this year with a goal of saving for her and teacher her about managing… Read more »
That is great you are starting Jasmine’s financial plans early. Will really make a difference. Yeah the time certainly has flown by since I started blogging. Keep up the good work on your blog as well. Hopefully I can continue my pace
Can you please adopt me? I could use me some 12% interest!
Seriously, though — excellent way to teach the magic of compounding to your daughter. It’ll really drive the point home in short order.
I know! I wish my investments had a risk free 12% return. Well I hope it plants the seed in her mind about power of saving. Have a great holiday season for you and your family as well
Brilliant wealth transfer strategy! I’m a fan of illustrating compound interest as early and dramatically at possible, although my kids only got 10% rates. They should have shopped around to your bank.
Thanks CD. Not sure what I was thinking with such a high rate of interest but fortunately the amount that is subject to it is not too onerous for me to float
We did the same thing. We continued it into their adult life as well but we used a more reasonable interest rate which was what I was paying for real estate mortgages. We used the kids as the bank. By the way, you can open bank accounts for the kids when they are younger, you just need to be on the account with them. We also did that with our kids. The oldest took us off the account when he got married and swapped our name for his wife’s name. He was a little surprised when he found out I… Read more »
Thanks Cory. Always nice to be featured on your blog.
Yeah I was told if I wanted to I would have to put it in my name but interest rate was so low it didn’t make a difference
The Bank of Mom and Dad is also an excellent place to discuss and model borrowing. The kids can finance computers, headphones or other essential to them objects . You can model the process of borrowing with written information and application for loan, coupon books and required weekly payments. You can go through all the steps that they will need at a later date. My son decided that even a no interest loan was too much hassle and too much risk of missing a payment and having the item repossessed. He decided to save from then on and have items… Read more »
That really is a great idea about incorporating a loan/installment type option. So far my daughter has saved things and bought them out right so no need for loans.
Appreciate your insight. Have a great new year