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Compounding Interest For Kids |
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Telling a young child about a financial concept, such as "compounding
interest," no matter how carefully explained, is no substitute for a
practical object lesson. Here's an easy, positive way to teach your
child for a cash outlay of about $25.00 or less about the benefits of
saving money and how compounding interest works:
You will need (for the first week):
1 Piggy Bank (about $5.00 to $7.00)
1 Dollar Bill
4 Quarters ($1.00)
(for the second week)
8 Quarters ($2.00)
(for the third week)
4 Dollar Bills
(for the fourth - and final - week)
8 Dollar Bills
When you and your young one have a little time together, just the two
of you, give them the Piggy Bank. Let them know this belongs to them
and is theirs alone and nobody else is allowed to lay a hand on their
Piggy Bank. (If there are brothers and sisters in the picture, you may
want to keep the banks in a safe place for all of them, such as the top
shelf of your closet, allowing access only to those to which the banks
belong). You could even choose to make it a tradition, say, when the
child enters first or second grade, they get the Piggy Bank.
After presenting the Piggy Bank, give the child a one-dollar bill and
instruct them to tuck it in the slot. If you can get a crispy new bill
from your bank to start things off, so much the better. The bill goes
into the Piggy Bank and - surprise surprise - tell them you will pay
them for saving their money. They can not spend this money or access
this money for a month. For anything. However, at the end of the month
it is theirs to do with as they please - even if it's to purchase
obnoxiously pink Barbie boots or gorge themselves on chocolate at the
movies (oh, come on, we all did it once upon a time, no?). However,
when given the choices (which we'll get to later on), your child may
surprise you after all.
Every other day for the first week, make a big to-doodle out of adding
a quarter to the fund in the Piggy Bank. After dinner or before bedtime
is best. You can make up your own little fun ceremony for adding to the
bank or just plop the quarters in and hear them clink and rattle - let
the child have fun shaking the Piggy Bank and hearing "all that money"
start to grow!
At the end of the week, perhaps on a quiet Saturday or Sunday if there
is such a thing in your household - okay - so make the time if you
must... take out the Piggy Bank and count the money: Wow! Two dollars
saved now! The money just doubled in interest!
Put the two dollars back in the Piggy Bank and, for the second week,
put TWO quarters in the bank every other day. At the end of that week,
your child will see the money grow to Four Dollars!
For the third week, at a rate of one quarter for every dollar (don't
you wish the banks were so nice?), their bank will grow to the lordly
sum of eight dollars. Since you're providing the compounded interest of
one quarter per dollar, at four dollars the rate is now a dollar every
other day so you might want to throw a few bills into the mix.
For the fourth and final week, add two dollars every other day and at
the end, have a "Break the Bank" ceremony and have fun counting the
money! Your child will see that by putting the money away, not only did
it grow a little but it grew a lot because the money earned on the
money saved also earned interest and that is what we call "compounding."
At this point, your child will have $16.00. As I said before, they are
free to do whatever they choose with the money - as promised. Or... you
can give them a choice - since $16.00 is a considerable fortune to a 7-
or 8-year-old.
Choice #1: they get to do whatever they want with the money (within
reason, of course). That includes renting video games or DVD's, buying
candy or those outrageous pink boots.
Choice #2: they can take half to spend and keep half to save. If they
choose this, you might want to agree to pay interest on the saved
portion of the money and, finally, when you have enough, take them to
the bank and help them open a little savings account of their own.
Choice #3: "The Rockefeller Principle" - they keep 1/3 of the money for
themselves to do as they please; save 1/3 of the money - again, you may
wish to continue compounding the interest for them; and 1/3 of the
money goes to charity - the Humane Society, First Aid Squad,
Bulletproof Vest Fund for Police Officers or perhaps they have their
own ideas of charitable contribution, such as "Jerry's Kids" or the Boy
Scouts/Girl Scouts. Which do you think your child will choose?
Leo J Quinn Jr. is a financial educator from the Albany, NY
area. Since 1997 he has been helping people dramatically speed up the
time it takes for them to pay off their debts. Leo has a special offer for readers of Fatherville.com
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