Raising Entrepreneurs

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A key money concept to teach your kids is the concept of compound interest.

Compound interest means that you get some interest, and then next time you get interest on your interest.

Over the long term, compound interest really adds up. Albert Einstein described compound interest as “the most powerful force in the Universe” - and he knew a thing or two about forces!

To do this demonstration for kids, we need to shorten the time span, so they can see the effect happening. Instead of years, we will use days, and instead of the interest rates the banks pay on deposits, we will use 50%, so it’s easy to calculate (50% is half).

Stop for a second!

Take a quick guess as to how much interest you will have to pay your child on one dollar, if you pay them 50% interest, compounded, each day for a week.

Have you guessed?

Read on …

Day 1: Take one dollar your child has saved, and put it in a big glass jar, somewhere prominent in the house.

Day 2: The next day, at the same time of day, have “interest time” - add 50c to the jar.

Day 3: The next day, at the same time if day, have “interest time” again - and this time, the interest will be 75c (50c interest on the dollar, and 25c interest on yesterday’s 50c). Make your kids work this out if they are school age!

Day 4: The next day, when you have $2.25 in the jar at “interest time”, you will be adding $1.13 in interest (halves round up).

Day 5: Now you have $3.38 in the jar, so the next day’s interest will be $1.69.

Day 6: Our total is $5.07, which means the interest will be $2.54 (halves go up).

Day 7: Your little tycoon is the proud owner of $7.61 - plus today’s interest of $3.81 - a grand total of $11.42.

Did you think you would be paying out that much?

Of course, in real life, it takes longer for compounding to really have a visible impact.

The purpose of this demonstration is just to give your kids a feel for WHY you keep going on at them to save their money.

If you want to give them a sense of urgency, ask them how much they would have made if they had waited a day or two before investing the money. You don’t lose the first day or two’s payouts - you lose the last day or two.

A hundred dollars put away before your child turns 10, even at a reasonably low rate of return, will turn into thousands by the time your child is 65.

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