Tuesday, April 16, 2013

Allowance Futures: An Investment Vehicle for Our Times

["Let Inga Tell You," La Jolla Light, published April 18, 2013] © 2013 

At an Easter brunch with friends, we were discussing the difficulty of finding good financial investments at a time when real estate has been problematical and most conservative vehicles are paying less than 1%. 

In a similar (if less volatile) market some years back, my now-husband, Olof (whom I was dating at the time), concluded after considerable contemplation and, more to the point, a lot of observation during weekends he spent at our house, that the investment of choice was allowance futures. 
The way allowance worked in my household at the time was that each kid got $4.00 a week, assuming, of course, that they got no fines for misbehavior.  Additionally, we had a bonus point system whereby exceptionally nice behavior (extra chores, a considerate act toward a sibling etc.) was rewarded with bonus points which were irrevocable (i.e. not subject to fines) and based on the theory that bad behavior shouldn’t cancel out good, and also that my older son, Rory, sometimes had more fines than the national debt.  Bonus points could be cashed in for $.25 or for staying up an extra half hour.  (They almost always took the cash.)  So if a kid was having an usually bad week, he could not only flatline his allowance but actually owe ME.

So the way Olof saw it, on, say, January 15, he’d negotiate with Rory to buy his April 1 allowance for say, $2.00, betting that Rory was going to behave and that I’d be paying more than that (up to the full $4.00 plus bonus points.)  If so, Olof got all Rory’s payable allowance that week.  Rory, however, knowing that he tends to mouth off a lot and that fines may eat his allowance down to nothing (or that he’ll even end up owing me money), thinks that $2.00 is better than the bupkes he frequently gets.  (Olof, however, didn’t want to take a total killing so he insisted on a stop loss order at $.10). 
My younger son, Henri, however, didn’t share his brother’s need to live not only on the edge but usually on the way far side of it, and tended to see a great deal more of his allowance than Rory did, often racking up substantial bonus points as well.  (This kid could suck up like you wouldn’t believe.)  So Olof was not likely to buy Henri’s April 1 allowance for less than $3.00 and probably even more if it looked like there could be good bonus point potential.  Henri, who was eight at the time, had already attempted to get in the game by trying to buy bonus points with his allowance because bonus points were not subject to fines but allowance money was.  It is probably not surprising that Henri ultimately ended up in business school. 

Like many futures contracts, seasonal factors would weigh heavily.  When home from school on Christmas vacation, the kids often got bored, calling Mom at work some 30 times per day to rat each other out, both of them ending up deeply in the hole by week’s end.  (What did they care; it was Christmas and they knew Santa would deliver even if the allowance fairy didn’t.)  But this kind of stuff was all insider information to which Olof, still commuting down on weekends from the Bay area, might not be privy.
You might ask what motivation there might be for any sort of decent behavior after a kid has sold an allowance contract.  A valid point.  But these contracts would be sold well in advance (they were, after all, futures) and Olof’s theory was that the parties wouldn’t remember or record what weeks they’ve sold.  Rory maybe, but even if deprived of all writing implements, Henri would have etched it on the patio cement with a garden spade. (See “business school,” above.)   So to make it fair, Olof wanted to be able to buy blind allowance contracts from the kids so they wouldn’t know what week they’d sold.  At one point Olof was even trying to figure out to work a straddle where he contracted with both the kids AND me. 

Olof thought that if he were doing well enough on allowance futures we could even could go public and sell allowance shares.  (I personally would have gone short on these.) 
But right about that time, the market picked up, and CD and money market funds became worthy enough vehicles again.  I merely mention this because in the current uncertain times, parents of elementary and middle school kids might want to consider allowance futures themselves.  It definitely pays more than your bank.

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