Investing With Class
by David Wolpe (TMF Dbunk@aol.com)
November 05, 1997

We left you last week on the edge of your seat, eagerly awaiting the answer to the overwhelming question: "How did it end? How did the investment lesson for fourth-graders turn out?" Your badly chewed cuticles will soon be on the mend. The answer is upon us.

What, on its most basic level, is investing? It's putting aside something now that will grow into something bigger, later. This often involves resisting the urge toward immediate gratification. And that, from what follows, as well as from experience, is clearly something that can be taught in the elementary school years. Whether it's "Save that piece of candy for tomorrow," or "If you put aside a little money each week, you'll be able to buy more than if you spend it right away," the principle is clear -- and learnable early.

Return To Scratch

For those of you joining us in mid-story, we're following some fourth-graders who raised money from investors within their community in order to construct a classroom. Each twist and turn along this path was used by the teacher (Steven Levy, author of Starting From Scratch) as a staging ground for the introduction of a specific skill. "If I noticed that the children did not know the proper form for writing letters to the investors, I taught them this skill. If we had to make a decision about which bank to put our money in and I saw they didn't understand interest, I explained it and gave them an opportunity to explore it and apply the concept in other situations."

Levy found that the children were loathe to spend money. (Hey! They're as cheap as we are!) Rather than buy tools, the children chose to bring in tools from home. They were, however, extremely generous when they learned that people in Mali had been forced to eat their seed crop because of a famine, or that a music teacher had had his keyboard stolen. The values of 1) learning while having fun, 2) making good money at the same time, and 3) displaying generosity of spirit, were thus being exhibited and reinforced at the age of ten -- Foolish principles indeed.

At the end of the year an auction was held, liquidating the assets, to pay back the investors. The children took turns being auctioneers, raffling off items such as knitting needles made from wooden dowels, the framed leaf that was the last to fall from the oak outside the window, and the desks themselves. Enough assets were sold to repay the investors, with plenty to spare. Shareholders could have made a handsome profit, but voted to return the extra desks to the class.

Levy writes of the partnership with the community: "Learning was released from the confines of the classroom and set free to explore the world.... Children expect parents and teachers to be interested in their activities. But the interest from the business and citizens of the community was completely unexpected. It inspired our gratitude and motivated us to work hard in everything we did."

RIMBY

We all remember the NIMBY syndrome -- Not In My Back Yard. But here is a case of RIMBY -- Right In My Back Yard.

Your intrepid Fool contacted a local elementary school in the Washington DC area, which, it was said, had an ambitious program of its own. This school has a student-run bank right on the premises. It's actually a partnership with a local bank, giving children the ability to open their own real-money bank accounts, complete with savings books. Children generally begin to save, using the school bank, around the second grade, but they can start as early as kindergarten. The account at the school is for deposits only; if they want to make withdrawals they have to go to the bank. The deposit process is actually handled by a student (generally a fourth- or fifth-grader) who is selected to be the "bank teller" by the teachers.

"Aha!" you say. "But is it popular?" There is always a line on Tuesdays, according to one teacher who gave us the skinny, which is the day on which a representative of the bank comes with cash box in hand to oversee the process of making deposits. "There is nothing quite like the thrill of depositing something into your very own bank account," said a school official. The counter looks like a real bank teller's counter, and children can deposit as little or as much as they like. If they deposit $25 in a month, the bank will give them goodies -- a kind of incentive plan.

What do the children understand of the banking and investing that they're doing? Money is used in kindergarten and the first grade to teach math; it's introduced as a counting tool: "If I have five dollars, and you give me two, how much do I have?" Although they understand the numbers, children at these early ages may confuse the price of a house with the price of a bicycle, one teacher noted.

By the fifth grade, the children are learning percentages and are better able to grasp the meaning of interest -- though probably not compound interest. "I just want to work at McDonald's," said a fifth-grader. His teacher gave him a formula: here's what it will cost you in rent, here's what you'll need to eat, here's what you might have to spend for other sundries (like clothes), and here's your minimum-wage salary. The boy rapidly understood that he might have to rethink his life's goals and aim a little higher.

Foolish Observations

The concept of saving is a profound one -- saving the environment, saving a tree, saving things for the future. It's a concept that young children can certainly understand, and the rewards of compounding will come later, in their time, when they are ready to be understood.

The above examples illustrate that children in elementary school can learn and develop some extremely valuable lessons about investing. There is no reason why parents shouldn't embark on similar projects. In doing so, you are passing habits to them that will serve them well later in life. If you are able to create or to tap into an environment in which this kind of learning is the norm, you'll be ahead of the game. The "bank deposit line" on Tuesdays at the local elementary school is a powerful motivating force, since it's socially accepted to deposit money -- "All the kids are doing it!" Steven Levy's fourth grade class forged a powerful bond with the community, but also among the students that made up the class.

Next week we'll take a look at the junior high and high school years, and we'll begin to examine what parents should be doing for their children, investment-wise -- no matter what the child's state of development

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