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. This perpetuates the very same problem most of us face because we weren’t taught how to do this either. So how to do we teach our children about the magic of compound interest?
What is 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. The magic of compounding should be taught from the earliest of years in school. It should be part of maths and life orientation at the same time as children are learning how to make plants grow.
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. As your children get older and understand compounding, you can start shopping around for better investment vehicles.
Watch this video on how compound interest works and show it to your children if they are eight years old and up:
1 week compound interest experiment
Children are concrete learners and so doing something practical, tangible and real enables them to learn more effectively. I picked up this worthwhile exercise for Teaching Kids About the Wonder of Compound Interest using real money from FamilyMint. It is based on an outrageous interest rate of 50% but for just on week, it is a fun ‘game’ to play to prove how compound interest works for your children:
Putting compound interest to work for your child
As a parent, as soon as you can, create a monthly investment for your child that is going to grow over the years. Remember that it doesn’t have to be a large amount. Start with what you can afford. If you can increase the amount, do so. But the secret is to start it soon and let compound interst work for you.
Children who receive pocket money and older children who are on 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. This may be for some sweets or an inexpensive toy, for example. Things they can afford.
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 them better. They are invested, so to speak.
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, sharing and caring.
Grow your child’s net worth
Helping our children to learn how to save, invest and grow their money will not only build their self worth but ultimately their net worth, laying the foundations for creating their own financial freedom one day. You will also ensure they will not be dependent on you financially forever. This is another way to future-proof your child. Start now!