It’s one thing to teach your child the value of saving, but teaching your child to be a strategic saver by understanding the wonders of interest can amount to thousands of dollars earned — or passed up — over the next few years. Learning how interest works, especially compounded interest, is an easy way to entice your young one to save and to start teaching the tyke about passive income. But how do you break it down without losing your patience and frustrating your kid? Â Here’s a quick and easy compound interest exercise you can perform every day for one week.
In this scenario, let’s use a 50% interest rate since it will be easy for your little one to calculate:
- Put $2 in a piggy bank and tell your child you will return tomorrow to allow for “interest time.â€
- The next day, add $1 to the jar since the money is growing at 50% interest. Explain to your child that since accumulating interest means adding an additional 50% to what was already saved, if this were a real savings account, that would mean that $1 would be added to the initial amount, bringing the total to $3.
- The following day, add $1.50, bringing the total to $4.50. Again, explain that since you are saving money, you’re receiving interest.
- The following day, at “interest time”, add $2.25 to the jar, bringing the total to $6.75. It’s important to reinforce the value of saving and understanding how interest works. Your child will be interested in additional money accumulated, too.
- Continue for an entire week, letting your child do the math for him or herself.
While it is unlikely you will ever have a savings or money market account with this ideal an interest rate, it’s a clear, explicit way to illustrate the benefit of saving money. Eventually, your child will be a young adult shopping around for money market accounts with the best rates.
Take this learning a step further by teaching your child about interest when it comes to credit cards. Let him or her know that just as your money grows when you save it in a financial institution, every time mommy or daddy swipes that piece of plastic, they will owe more than the price of whatever it is they just bought. Reinforce this every step of the way so your child will understand that when you pay by credit card, you’re not just paying the sticker price, you’re paying interest. When kids understand how money works, they’re more likely to be conscious about spending and saving.