Home > Kids > Values and Responsibilities > Money and Kids > Top 5 Money Concepts to Teach Your Kids
|

Top 5 Money Concepts to Teach Your Kids

4. Embrace the power of compound interest

There's an apocryphal tale that Albert Einstein, when asked to name the most powerful force in the universe, answered "compound interest." While the story may not be true, the concept certainly is. Compound interest simply means that the rate at which your money earns interest increases over time.

You can teach your kids about the power of compound interest with a simple exercise. Put a penny on one side of a table, to represent an account bearing compound interest, and a dime on the other side of the table, to represent an account bearing simple interest. Ask your child which will grow to a dollar in fewer steps: the penny, if you double it at each step, or the dime, if you add an additional ten cents at each step.

Need a hint?

  Compound Interest Simple Interest
Step 1 $0.01 $0.10
Step 2 $0.02 $0.20
Step 3 $0.04 $0.30
Step 4 $0.08 $0.40
Step 5 $0.16 $0.50
Step 6 $0.32 $0.60
Step 7 $0.64 $0.70
Step 8 $1.28 $0.80

The penny, representing compound interest, has grown to $1.28 by the eighth step. The dime has become only 80 cents. The difference will only continue to widen. This will help your child to learn the importance of giving her money the time to grow in an interest-bearing account. What starts off as a little bit of interest will, given enough time, eventually become an enormous amount. The earlier you start saving, the better.

5. Beware of credit

Credit cards can be valuable tools in a healthy financial lifestyle, but kids need to be taught from an early age that credit cards are not free money. Here, again, you can give age-appropriate lessons in how credit works by simplifying the concepts and acting as your child's bank.

If your child wants an item that costs $20, you'll agree to extend credit, under the following terms.

  • There is a grace period of one week, after which the interest will start to accrue.
  • The interest rate is 20% per week.
  • The minimum payment is $5 (or whatever her allowance may be).

How will that work out?

  Balance Interest Accrued Minimum Payment
Week 1 $20.00 $0.00 $5.00
Week 2 $15.00 $3.00 $5.00
Week 3 $13.00 $2.60 $5.00
Week 4 $10.60 $2.12 $5.00
Week 5 $7.72 $1.54 $5.00
Week 6 $4.26 $0.85 $5.00
Week 7 $.11 $0.02 $0.13
Total $0.00 $10.13 $30.13

If your child pays only the minimum, she will end up paying $10.13 more for the $20 item over a seven-week timeframe -- and sap her allowance every week. The sad part is, these terms aren't that different from the ones offered by the credit card companies!

You can adjust any of these lessons to suit your own kids and circumstances. No matter what, teaching your kids about money now will pay off later.

More on: Money and Kids

|


stay connected

Sign up for our free email newsletters and receive the latest advice and information on all things parenting.

Enter your email address to sign up or manage your account.

Facebook icon Twitter icon Follow Us on Pinterest

editor’s picks

jack-o'-lantern creator

Design and print
your own
jack-o’-
lanterns!

GO

highlights

Top 10 Group Halloween Costumes for Families
These store-bought and Pinterest-inspired Halloween costume ideas for groups are the perfect way to show off your creative side at your Halloween party or while trick-or-treating.

Kindergarten Readiness App Wins Gold
Our Kindergarten Readiness app won the Gold Award of Excellence in the educational category at the 2014 Communicator Awards. This valuable checklist comes with games and activities to help your child practice the essential skills she needs for kindergarten. Download the Kindergarten Readiness app today!

12 Spine-Tingling Halloween Movies for Teens
Are you looking for a movie with just a little bit of spook-factor for your teen? Check out these 12 spine-tingling Halloween movies!

Find Today's Newest & Best Children's Books!
Looking for newly released books for your child? Try our new Book Finder tool to search for new books by age, type, and theme, and create reading lists for kids!