This blog post was written by the Iowa Credit Union League
Which would you rather have — a million dollars right now, or a penny that doubles every day for a month?
If you’ve never done the math, it’s quite interesting. On day 28, the “penny” has now doubled to over $1.3M. In a month with 31 days, the penny you received on day 1 would be worth over $10.4M.
Makes a million seem like chump change.
Now, to be fair, this penny more than likely doesn’t exist, however the 31 days in a month could be compared to 30 years of saving and investing. The earlier you get started with consistent “investor behavior” (that is, the behavior of investing each month), the sooner your money begins to exponentially multiply.
This is especially important behavior for young people to learn, as the sooner (and more) they save and invest, the more rapidly they can achieve a point of financial freedom. By educating your kids about the power of compounding interest, they can begin building very substantial retirement accounts from an early age.
Early elementary students are not going to grasp the concepts of investment ratios or compounding interest. What they will understand is that investing time and effort into projects will reap greater benefits. The book The Little Red Hen is a great way to start this discussion. In the book, it is the hen who work shard to grow the wheat and invests time in the process of making the bread, while her friends do not want to help. In the end, the hen gets to enjoy the bread, while her friends are left with no bread.
To teach the concept of investing to young children, consider starting a garden. They will need to invest time and effort into planting, watering and weeding the garden, but over time they will be able to enjoy the food the garden produces. This is a great lesson in investing!
When your child is old enough to understand the concept of money, set up a savings plan with them. To grow their investor behavior, suggest that the money your kids get for allowance, working part-time, or for birthdays, gets put it in a savings account where it will earn interest. Watching the monthly balance raise and reviewing the interest calculations on their statements will help them understand basic interest.
When in middle school, begin discussing the concept of compound interest. Demo a compound interest calculator – there’s a great one available on investor.gov.Show them if they invested their weekly allowance and earned a better return,they would make more money over time than in their savings account alone. This is also a great time to help them set up an investment account through E-Trade or another similar service. These services allow you to set up a monthly investment that will pull money directly from your child’s checking account and track the progress online. Even by investing small regular amounts, your kids will begin to understand the power of investing.
So while you’re teaching your children good manners, the importance of good grades, and how to change the oil in your car, add investor behavior to the list. They’ll one day thank you for it!