Teaching kids compound interest


#1

I was listening to choose Fi and the guys were talking about teaching their kids about compound interest.

Have you done that yet? Do you have any suggestions? What age was the kid when you did?


#2

I was a little older than a kid, maybe middle school, but I still remember a classic question from math class.
Should you take a job that paid 100$ per day for 30 days,
or a job that paid 1 penny the first day but pay doubles every day for 30 days.
Any kid with a calculator can figure out that you’re making millions per day at the end of 30 days.
It’s then easy to show them 100 bucks after 21 years at stock market returns is 3 doubles and 800$.


#3

I showed my kids the penny doubling video. It’s like an exaggerated view of the power of compounding, but easy for them to understand.

Once they’re older I’ll talk to them more about the power of compounding but I think the penny doubling example is a good start.


#4

I remember the doubling penny question from 3rd grade but it didn’t really sink in. I like the example but the problem is it is a bit of a stretch because it is an impossible scenario.
I feel like a real-world example would do better or am I using my adult mind too much?

it’s a great way to show the values of binary though #computerGeek


#5

Another vote for the doubling penny, for me. It stuck with me from a very young age.

If you follow it up with a real world example of 7% stock returns compounded over a lifetime, I think it does the trick.


#6

I think the penny is good to teach the concept. Kids can’t think very long term, doubling every day is something they understand, but doubling every 7-10 years will seem like forever. Real examples work better once they’re in middle school or high school.


#7

That’s true. Time is a tricky thing for little kids


#8

sadly nobody taught me this at school… I wish they had. Even in maths lessons when they referred to it, they didn’t really show us the power of it. I wish they had! And even more important, exactly what you paid when you borrowed at compound interest rates!

I built an excel spreadsheet for some young friends. Plug in the amount they have in savings today, plug in how much they want to save, and an approximate interest rate. It is so powerful when it shows the result 40 years hence!


#9

Every kid is different. Their math ability, abstract reasoning, and logic develop differently and at different ages. it can’t hurt to try and teach the lessons. it may or may not sink in.
At or after middle school, they should understand percentages and graph trends. It is a great time to look at stock market, cost of stamps, and speed of computers type examples.
Some of my high school seniors don’t think that way, or get graphs. Some think it is an easy concept.


#10

I wish I was taught the double penny trick. That sounds great.

So… when do you teach them? Around what age would be the most beneficial? Also, should it be repeated to them so that it really does stick in their mind? Asking for myself for when I have kids.


#11

I start teaching my kids the basic idea that saving and investing is a good thing that can earn you more money around 4-5, depending on the kids maturity. My older sons saw the penny doubling video when they were 8 and 12, I think, but they would have understood it around 7 or so. They need to be able to understand what a penny is and what ten million dollars is, and how far apart those are, before they can appreciate just how much money the doubling gets you. Otherwise if they’re too young, a thousand dollars and a million dollars both seem like the same thing.


#12

We started the Bank of Mom and Dad last year, inspired by MMM’s post of a similar nature. It pays a whopping 5% interest per month, as we wanted to demonstrate compounding in a dramatic fashion. Kids were 7 and 9. Our motives were that 1) the kids were accumulating too much crap, and 2) the grandparents, in their generosity, were gifting cash that we preferred the kids invest instead of spending, since they had adequate toys, etc.

The first of every month is compound interest day, and we sit down and review on a spreadsheet how much they’ve made by investing instead of saving. They jump up and whoop on hearing how much they’ve earned, especially as the numbers have snowballed. Both kids have run up to me after finding a few cents on the playground at school to ask me to invest it for them. My son (a lego fiend) has decided that he would prefer to save most of his cash to invest and buy one moderately-priced set instead of buying multiple more costly ones.

Once they hit a set threshold, we will invest it VTI and check in monthly. To prep them for investing, we had series of talks using a lemonade stand analogy. Friend needs $5 to buy lemons, sugar, cups. Loan $5 (bond) pays $6 a year later. Invest $5 for an ownership stake, get $.50 a month in perpetuity. They could do this math and seemed to get it. Built on the talk a few months later: diversify by investing $2.50 in lemonade stand and $2.50 in a hot chocolate stand to reduce seasonal income volatility. Now invest $.50 in five lemonade stands and five hot chocolate stands to reduce risk (indexing).

I’m concerned a market correction could undermine their enthusiasm if they see their numbers plummet once invested, but plan to have them stay the course and learn from the experience if it happens. Wife and I thinking the funds could help buy them phone or car when they get much older. We fund separate 529s for each.

Would love to hear others’ variations on this theme (analogies used, incentives offered) if anyone would care to elaborate!


#13

I’ve done it with my boys (7, 9), by just posing the penny doubling scenario. They of course chose the other, “wrong” option. Which then made for a great teaching moment. I’m not sure how much sunk in, but time will tell I guess. :grinning: