3 Fun Ways to Teach Kids Compound Interest

Teaching children the power of investing should be mandatory in kindergarten. Why? Because kids have the greatest asset of all… time! It’s no secret that we all want our children to grow up to be the best they can be. We want them to be successful, to feel secure, and to attain their dreams.

We want to give them everything we didn’t have. So we spend our money on educational products that claim to make our children faster, better learners. We feel that if we give our kids a head start in life, they will have an advantage.

We have been fooled again.

The book Einstein Never Used Flash Cards offers scientific proof that children learn through love, natural play, and at their own pace. Cramming it all in at an early age is not guaranteed to give them the intended jump-start — in fact, such over-stimulation can be a detriment to their learning process.

However, Einstein himself did believe in the power of compounding, claiming it was the eighth wonder of the world. So don’t buy it — literally! Save your money instead of spending it on trying to make your one-year-old a genius, and invest it. Children cannot possibly know what compounding interest is, or what investing is for that matter.

So it is up to you to teach them through your actions. Communicate with them — let them know what you are doing and why in a way that they can understand. Show them a dollar and say… ‘I’m investing this in you and building a strong, secure foundation for your financial future, because I love you.’ This shows them that you believe in them and care about their future enough to start their life out right before they can take matters into their own hands.

Penny for Your Thoughts

If you want your kids to never pass up a penny on the sidewalk again, ask them one question: what would you rather have? A million dollars right now or a penny doubled every day for 30 days? Before you read further, ask this question to yourself — which would you take? Write down the answer. Most kids are shocked when they see the following: (for space reasons calculated by weeks.) Click link below to print for your kids 1millioncent Day 1 (1¢) Day 7 (64¢) Day 14 ($81.92) Day 21 ($10,485.76) Day 28 ($1,342,177.28) Day 30. ($5,368,709.12)

So if you picked the immediate million you let go of about 4 million in the long run. If you picked the penny, then you thought beyond the obvious, a valuable habit in today’s world. Oddly enough, spenders tend to want the million dollars, revealing their tendency to act in order to obtain instant gratification. Savers tend to think a little more, choosing not to react impulsively, waiting to see what the penny doubled will become. This is a wonderful way to show children how money can grow, multiply and compound in ways they do not anticipate — all with a little patience.

The definition of compound interest is simple, but few people understand the power of compound interest. Simply put, this is calculated not only on the money you originally invested, but also on any interest the investment has already earned. For example, 10% on $100 is $10 = $110. Compounding is when the interest earns interest. $110 earns $11 = $121, $121 earns $12.10 = $133.10, $133.10 earns $13.31 = $146.41. It’s a beautiful thing.

Money Grows Over Time

Children have the greatest gift of all when it comes to investing — time is on their side. It’s never to late — or too early — to start investing. It doesn’t matter if you have a newborn or a teenager; they have many years to enjoy the benefits of compound interest. For example if you saved and invested $1000 on your child’s first birthday and never invested any more, just look what compounding can do, over time — $1000 invested for 5 years 9.8% = $1,595.92. $1000 invested for 10 years 9.8% = $2,546.97. $1000 for 20 years 9.8% = $6,487.04. $1000 invested for 65 years 9.8% = $435,664.43. Note that even though interest rates are below 9.8%, we’ve based this chart on historical rates of return from 1926 to 2010, the S&P 500 average an annual 9.8% gain (CNNMoney).

And yes, this does not include inflation and market fluctuation. However, one thing is for sure — if you invest nothing, you will have nothing. As your children grow, encourage them to add to their savings and investments. In this way, investing becomes second nature. The SEED initiative shows that children who have savings and investments have less stress, more hope for the future, and are seven times more likely to attend college than similar youth without an account.

Our Youth Want Financial Education

The crisis changed things drastically. There are fewer jobs and the cost of education is higher, resulting in more debt for kids and their families. Junior Achievement released survey results indicating that even though 8 out of 10 teenagers say that the recent recession has motivated them to learn how to manage their money, less than half report discussing money management with their family. 92% of teens learn money management from their parents, but only 43% of them have discussed it as a family. Your kids do want the information; they just don’t know where to look for it.

The future is uncertain, leaving many things out of our control. Money, however, is one item that will never change — we need it to live, to eat, and to grow. Kids need to know this so that they can arrange their priorities appropriately. If you educate your child in money matters, teaching them the value of the security of “money in the bank,” then they will have the fundamental stability needed for them to overcome other obstacles that life presents.

One thing is for sure — money gives you freedom, choices and security. Teaching children how to control and multiply their money will be the safest investment that we can offer them now and for a lifetime.

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