In a recent workshop someone asked me what I thought the most important financial lesson a kid could learn besides saving money. I told them to teach them about the value of interest and how interest compounds on itself, so the recipient ends up with a lot more money than they started with.
But, How Do I Teach My Child About Interest?
Interest is intangible, so it's rather difficult to teach to a child. In a recent blog post, Tamara E. Holmes had a brilliant idea: tell your children that when you deposit money in the bank the bank is using your money. For the service of using your money, the bank pays you a fee, not unlike the fee you pay when you rent a movie. You're paying for the use of the movie; the bank pays you for the use of your money in the form of interest.
Children Are Experiential Learners
Children really do learn by doing. Here are a few ideas:
- Set Aside Part of Their Allowance. First of all, they should set aside an amount for charity. Next, they should learn to save, so they should set another amount aside for saving and it should be deposited in the bank. They will see that after a period of time their $200, or whatever they've deposited, will grow.
- Borrow Some From Your Child. If you see their home "stash" is growing, ask them if they can lend you $5. Pay them back with $6. Wow wee!
- You Become The Lender. If there is something they just can't live without and they swear the world will come to an end if they don't get it, and they don't have the money for it, then loan it to them. They'll see the true cost of the purchase when they have to pay you back with more than they borrowed.
- Show Them The Credit Card Bill. If you don't pay your credit card bill in full, let them see the statement. Show them the purchases that were made and the total of those purchases, which is then exceeded by the total amount of the bill; they'll see the difference is interest.
If you have any other thoughts on teaching your kids about interest, or teaching your children about any other financial matter, please let us hear from you.