When it comes to money and kids there is one fundamental lesson most of us fail to teach our children, and that is how to make money grow. Without internalising this lesson and putting it into practise, they only learn how to make money and not how to create wealth.
How to do we teach our children about the magic of compound interest?
Money saved and invested over a long period of time will attract compound interest versus money that is just stored in a jar or stuffed under the mattress. It should form part of the maths and life orientation curriculum. Compound interest is interest that grows on itself. There is magic in this and we need to ensure our children are touched by this magic if they are to learn the fundamental lesson of wealth creation from an early age.
There are three elements to compound interest:
• Time – the longer you invest your money for the more it will grow
• Amount – the more money you can invest the bigger your growth will be
• Interest rate – this varies, so look for investments that pay good interest rates. Normal savings accounts usually attract low interest rates.
1 Week compound interest experiment
Children are concrete learners and doing something practical and tangible, enables them to learn more effectively. I picked up this exercise for Teaching Kids About the Wonder of Compound Interest using real money from Family Mint. Play this game for one week to prove how compound interest works.
Day 1, have your child “deposit” R1 into an envelope, jar, bag or whatever, and explain that they will be earning interest each day at a rate of 50%. Depending upon the age of your child, you may have them compute how much they would earn each day.
• At the end of each day, add the “Interest Paid” shown on the column above. Explain that interest is earned on their deposit balance from the prior day. Beginning on the third day, they will earn interest on their interest. This is the compounding effect.
• At the end of 7 days, your child will see their R1 grow to R11.39 because of the positive effects of compound interest!
Deposit Interest Paid Principal + Interest
Day 1 R1.00 R1.00
Day 2 R0.50 R1.50
Day 3 R0.75 R2.25
Day 4 R1.13 R3.38
Day 5 R1.69 R5.06
Day 6 R2.53 R7.59
Day 7 R3.80 R11.39
Putting compound interest to work for your child
Create a monthly investment for your child that is going to grow over the years. It doesn’t have to be a large amount. Start with what you can afford and increase the amount, when you can. The secret is to start soon and let compound interest work for you.
Children who receive pocket money or an allowance should be doing four things with their money:
SPEND some money now. Children need to experience what it feels like to use their money on low value items they can afford, eg . for some sweets or an inexpensive toy.
SAVE some for something they want to buy in the future – if kids use their own money to buy things they are likely to appreciate them more and look after these things.
INVEST some in an investment vehicle that attracts a good interest rate. The earlier they get used to putting money away for their future the better. This demonstrates vision and big picture thinking.
GIVE some away to charity – this demonstrates a spirit of generosity and caring.
Grow your child’s net worth…by laying the foundations for creating their own financial freedom one day… START NOW!
By Nikki Bush Posted May 16, 2016
In Blog, Education & school, Future-proof your child, Maths, Money