This week we’re picking up where we left off and covering compound interest, mortgages, loans, taxes, and financial mistakes.
To help your children begin to understand compound interest, mortgages, loans, taxes, and financial mistakes, try some of the following strategies:
1. Investing & Compound Interest
Investing and compound interest are really important concepts, but can be tricky ones to teach, especially if you have young children. Here’s how I helped my kids understand:
Step 1: Explain what interest is to your kid(s) in very simple terms (ex. Interest is what the bank pays you to keep your money there).
Step 2: Take a Ziploc bag of pennies (finally, a use for all the pennies we can’t use anymore!) and give it to your kid(s). Make sure you have an extra Ziploc for yourself.
Step 3: Each day at breakfast, ask them to “invest” one penny into The Bank of Mom &/or Dad (TBMD), and get them to drop their penny into your Ziploc.
Step 4: At the end of the week count how many pennies are in TBMD (your Ziploc).
Making The Connection: Kids are observant, so they’ll most likely make the connection that there are more pennies in the jar than what they deposited initially, and the longer they leave the pennies there the more pennies they could end up earning.
If you don’t have a bag of pennies lying around you can try this alternative that I’ve heard works for other parents and their kid(s):
Step 1: Ask your kid(s) if they’d rather $1 or $10,000 (most kids will choose the higher amount).
Step 2: Ask them the same question again, but this time tell them that the penny will double it’s value every day they leave it in the bank (After 30 days, they’d have $5.3 million!)
Making The Connection: While that rate of growth isn’t likely, it will help your kid(s) understand how money invested grows.
2. Loans, Mortgages, & Debts
Unless you have older children, I’d keep this simple and explain that a loan is when you borrow money that you have to pay back. I’d also explain that when you have to “pay back” money on a loan, outstanding money is also known as debt. A mortgage is a good example, because it’s a long-term loan, that has a down payment, can have different monthly rates, and has fees. Learning early about loans, mortgages, and debts, and how they impact each other can help prevent your kid(s) from making huge financial mistakes later that could potentially put them in a financial hole they may have a hard time getting out of.
3. What Taxes Are & How They Work
I recommend waiting until your children have a solid foundation of math, and then come tax time, invite them to “help” you do the taxes. Explain why taxes exist, what you pay taxes on, and answer any questions that come up.
4. Financial Mistakes
This can be as easy as telling them a time you made a bad financial decision. Whether you made a bad investment, or a bad loan. Talking to your kids about mistakes you’ve made may help them learn from you.
The Investment Of Your Time Will Be Well Worth The Return
People spend more time trying to use their smartphones than they spend becoming financially literate, and that is a debt inducing shame. While some concepts may take more time to teach, starting the conversation at home and helping your kids become financially literate means you are setting your children up for future success.