Look at the difference between compound interest and simple interest!
“My wealth has come from a combination of living in America, some lucky genes, and compound interest” – Warren Buffett
When one of the richest people on the Earth gives actionable advice that anyone can take it’s worth listening to. He’s used the magic of compound interest better than anyone.
Here are four fun ways to teach compound interest to kids:
Read A Book About Compound Interest
My third grader did a play at school called One Grain of Rice. We had read the book earlier this year.
One Grain of Rice is a lesson on how a grain of rice doubled every day for a month becomes a huge number – enough to bankrupt a kingdom. Substitute a penny for the grain of rice and there will be enough money to fill a mountain!
Read my One Grain of Rice article here. It has an interactive spreadsheet, which illustrates it better than a compound interest calculator in my opinion.
Give Kids Firsthand Experience
You can read books about fixing cars or programming computers. Reading is not the same as doing.
In The First National Bank of Dad (Review), I learned a technique where kids are given monthly interest payments on their deposits. Shorter compounding periods help kids notice the money growing faster. This creates an incentive to save more.
For example, a 3% monthly interest rate is an annual 42% interest rate. It’s something that many parents can do because kids don’t have $100,000 of principal to break the bank.
You may think that putting kids’ money in a traditional savings account is a great choice. However, the interest earnings are so low it will take them the rest of their lives to earn much. It’s no way to show how the rewards of compound interest are often described as the eighth wonder of the world.
Watch a Video About How Compound Interest Works
This video explains how the above works with a 10% monthly interest rate. It also illustrates how compound interest works over a lifetime:
While the video says it is geared to grades 5-8, I think it works for grade 3 and maybe even some second graders. The multiplication at the beginning is the most difficult part, but it’s very quick and kids don’t have to follow the math exactly to get it.
Take A Course MoneyTime is a course to teach kids about money in general. It covers much more than compound interest. MoneyTime has some gaming features like allowing kids to create their own avatar.
Teaching compound interest to kids is especially useful because they have more time to grow their money. The video above showed how much of a difference there is between an 18 and a 25-year-old saving over time. Imagine if you can start even seven years before the video’s example.
A money mistake or a good way for a kid to spend $7?
A few weeks ago, I took the kids shopping for Mother’s Day. Since they are 8 and 9 years old, it’s one of the rare times that they brought their spending money and had a chauffeur to take them around town. They did the appropriate shopping for mom, but I encouraged them to spend some of their savings on themselves. My 8-year-old bought this shark pen on the right. It was at a boutique store and it cost $7. When you “chomp” the shark’s mouth the pen tip comes out. My 9-year-old could have bought one, but it would have used all the money he brought. He knew that we are going to Dollar Tree later to buy cards for Mom, so he saved his money.
I was delighted by both of their money decisions. I certainly wouldn’t have bought a $7 pen. I personally think it was a money mistake, but I wasn’t going to talk him out it. I’m not sure what he thinks of the pen now. He brought it to school and I haven’t seen or heard of it since. It could be the “it” toy of the class. I suspect it was cool for about five minutes and then got old. When he comes home from school today, I’ll ask whether he got more enjoyment out of the $7 shark pen or the $6 Sushi Go! game that we played every night for weeks. I think I know the answer.
My 9-year-old bought a couple of items at the Dollar Tree. He got a little toy car. Unfortunately, we’re getting to the age where the dollar store toys aren’t the thrill they once were. Then he did something unexpected that surprised me. He got a box of Jell-o and said, “I want to make this with Mom for Mother’s Day.” He loves to cook and my wife loves to cook with him. It was the perfect experience gift! Plus who doesn’t love Jell-o?
He may regret the little toy car purchase a little, but his downside is minimal. In the worst case scenario he’s lost $1.25. That’s not too bad.
This was also a good time to bring up that Dollar Tree raised all its prices recently. My kids remembered when everything was just a dollar. I was able to explain that it was simply inflation just like the money conversation from a couple of weeks before.
I can read money books and they can read kid money books, but we both need hands-on experience too. We try to never underestimate the power of experience. There’s a show on Netflix called “Old Enough!” It’s been running in Japan for several decades. The show follows really young toddlers as they run errands around town for their parents. Some of these children are 2 and 3 years old. That’s not something we’ll see in the United States any time soon. The reason the kids are able to run these errands is that they’ve done them before with their parents – not just once, but many times.
That’s one of the reasons why I believe you should give your child an allowance. Everyone needs to have money before they can use it. It’s good to learn from losing a few dollars at this age. The lesson is lot more difficult later when more dollars are on the line.
* Mother’s Day cards are usually 50 cents – a much better deal than the $2.99 or $3.99 that you might pay elsewhere.
Last week my son’s third-grade class performed a school play, One Grain of Rice. We had read the book the previous summer as I had heard it was a great book that teaches math. Just check out the Amazon Reviews – have you seen anything so highly rated?
Before I explain the story, I will warn you that this article is going to contain spoilers. If you are a parent reading this hopefully you can live with a spoiled book for elementary-age kids.
The story of One Grain of Rice is simple. A humble peasant does a good deed for the ruling figure and asks for one grain of rice doubled every day for several weeks or a few months. I generalized that because my son’s school play version had some differences from the book version. The good deed, ruler, and time of the grain of rice doubling were different.
The ruler grants the peasant’s request for the doubled grains of rice. Around 20 days he starts to regret the decision as he has to give over a million grains of rice away. Eventually, the peasant becomes the town hero with all the wealth to spread through the town.
Try One Grain of Rice On a Spreadsheet With Your Kids
I found this project with a spreadsheet. I originally found it as a great summary of the story itself, but it’s a great kid-friendly introduction to spreadsheets.
If you get used to using the spreadsheet it will be useful when you try to model one grain of rice with money:
One Grain of Rice With Money
Taking the lesson of One Grain of Rice and applying it to money isn’t a stretch. In the story, rice is essentially the kingdom’s form of currency. (It makes more sense than using bees as currency)
It would be nice if we could double our money every day, but there’s not an investment in the world that would do that. Instead, you may choose to explain that it’s reasonably possible to double your money every 6 years or so. Some parents out there might be familiar with the Rule of 72. The Rule of 72 states that money doubles every X years depending on the growth percentage. For example, if you are earning 5% interest, it will take about 14 years for your money to double – (72 divided by 5 is about 14 years). If you can earn 12% interest, it will only take 6 years for your money to double – (72 divided by 12 is about 6 years).
Assuming a 12% interest rate over the long haul may stretch reality a bit. The stock market has returned that much for long periods, but it’s far from a guarantee. It’s more of an exception than the norm. We’re looking to motivate kids with the power of investing, so you may want to focus on the sunnier side. You also may want to create your own Bank of Dad where you can afford to pay higher guaranteed interest rates (at least for a little while).
You may want to run a few scenarios with your kids. Using that “money doubles every six years” you could find that you have 5 or 6 doubling events by the time they are mom and dad’s age. By that time, a dollar invested at their age might be $32. One hundred dollars would be $3,200. You can blow their minds by going to 10 doubling events in 60 years when a dollar is worth over $1000. Of course, they might not care because it’s hard for kids to imagine a 68-year-old version of themselves.
Naturally, I fast-tracked Grandpa’s Fables to the top of my “to read / to review” list. To be honest, it helped that the Kindle price is currently $3. This was an easy buy because I get to help a fellow kid financial literacy advocate… and because I could be frugal at the same time.
Grandpa Fortune Fables’ Audience
Grandpa’s Fortune Fables was written for kids ages 7-13. This is a much better fit for my kids (age 8 and 9) than M is for Money. That book was aimed at younger kids. I was able to read it myself over two days. I’m a slow reader and it took me around a couple of hours. It’s 21,339 words (that information is a tiny bit of a spoiler that you get at the end of the book).
My 8-year-old is at a guided reading level of “N” and he did two chapters earlier today. I was hoping to have my kids read it and contribute to this review, but they could sense that it was “learning” and resisted. When I convinced my 8-year-old to read one chapter, he read a second one on his own because he wanted to solve the money code. Each chapter has a question at the end about the main idea. The correct answer corresponds to a letter. Get all the letters and you solve the money code, which can be used for a discount to a money club.
Maybe it’s my kids, but I’ve found that a book needs to have a gimmick to hook my kids. They’re busy with school, karate, soccer, baseball, scouts, music lessons, Duolingo, etc. I can understand why they wouldn’t want to do extra reading.
Grandpa Fortune Fables’ Format
I had expected the book to have different, unrelated money fables. I was pleasantly surprised to find that all the fables are connected by a running story of a couple of main characters. Most of the chapters end with a bit of a cliffhanger, which made it difficult to put down. I wasn’t expecting to read it in two days, but I just kept on flipping through to the next chapter to see what the next money lesson would be.
The characters themselves are a little reminiscent of Rich Dad, Poor Dad with one character who is good with money teaching the kid who comes from a family with poor money management. Rainey does list Rich Dad, Poor Dad as one of the inspirations for his book. It’s a little outside the scope of this review, but I’ve included more information at the end of this article about why I cringed when I saw this. Fortunately, readers of Grandpa Fortune Fables can be blissfully unaware of this reality and still get great financial information.
Grandpa Fortune Fables’ Money Lessons
There are 14 money lessons covered in the book. They are:
Everyone Can Become Wealthy
Getting Rich Quick
Rich Vs. Wealthy
Working Smart
Kid Entrepreneur
Save Then Spend
Invest
Debt and Gambling
Tax
Risk
Strategy (Leave Investments Alone)
Home is not an Asset
Charity
Starting a Business
Almost all of the chapters are done extremely well – so well, I couldn’t imagine any way to improve on them. However, the chapter on debt used a metaphor of growing red trees to illustrate debt seemed out of place. I understood what the metaphor meant knowing that compound interest in the form of debt can work against you. It just wasn’t clear in the book why the character loaning the money would plant a tree to represent how much debt the borrower would need to pay back. Even then, I can’t think of a better analogy to model it.
The chapter on your home not being an asset is a valuable lesson, but I’m not sure how relatable it is for the average 10-year-old who doesn’t own a home. This is one money lesson that will probably need reinforcement every few years until the young adult gets to house-buying age. This chapter will be a great discussion with our kids when they ask about why all their friends live in mansions and we live in a more modest house.
Final Thoughts on Grandpa Fortune Fables
I may have been overly critical on a couple of minor points of this book. I think that’s because it is overall so well done that those minor things stood out to me. I have previously said that If You Made a Million is the best personal finance book for kids, but Grandpa Fortune Fables surpasses it. In hindsight, If You Made a Million, tries to cover too much taking you from a description of what a penny is to financial independence by earning interest on a big nest egg.
The stories in Grandpa’s Fortune Fables are more engaging than the If You Made Million. I would love to have seen this book come home from school because my kids would have had less resistance to reading it. It should be the core book of any financial education for kids ages 7 to 13.
The problem with the Rich Dad, Poor Dad
Rich Dad, Poor Dad is widely considered the worst personal finance book. It comes up on most search results for “Worst Personal Finance book.” The author Kiyosaki himself seems to be modeled in Grandpa’s Fortune Fables as Shovel Sam – the scammer who tells everyone that there is gold on the island so he can get rich selling shovels. Kiyosaki is active in the MLM/pyramid scheme community. He’s also sold a $45,000 course on real estate and suggested that people fund it with credit cards.
You can learn more about these courses in this CBC Marketplace news expose:
Yes, today is Earth Day. I don’t know about your kids’ school, but my kids’ school puts a lot of focus on the environment. Maybe it’s just being a good citizen, but I think some of it is because Rhode Island is the Ocean State and we see all the trash that gets washed up on our beaches.
When COVID shut down schools in spring of 2020, I “taught” Earth Day by introducing them to a classic show from my youth, Captain Planet. (Sorry, it seems no streaming service includes it. If you choose to buy it from that link, Kid Wealth may earn a commission.) We got through four episodes, which was enough television for a homeschool day. While I do encourage teaching kids with television, sometimes you need something more “hands-on.”
What if you could do something for the environment and make money at the same time? I was at a yard sale with my son and this can tab bracelet caught my attention. It was mixed in with a bunch of odds and ends. It was only a quarter, but I would have easily paid a couple of dollars. Of course, I had to have it. My son wore it religiously, but after a few weeks he moved on to something else. I guess he’s a typical kid, right?
We bring it out every Earth Day because it sparks a conversation about smart recycling. However, this Earth Day, I thought, “What if we made them and sold them?” Wouldn’t that be a good business? The cost of goods (can tabs and string) is very, very close to zero. Hopefully, you have access to a bunch of can tabs – recycling them is the point of Earth Day. We don’t have a bunch of them, so we’d have to buy them. If you already have can tabs, the biggest cost is the “Inspire” tag in the picture. You can buy 80 different motivational tags on Amazon for $11 – about 15 cents each. My 9-year-old says that his friends would probably pay $3 to $5 for one. That’s a profit of more than $2.50 and $4.50 for each sale.
Before you can legitimately consider this business, you’d have to know how to make these can tab bracelets. Fortunately, the internet has you covered. Here’s an Instructable on making can tab bracelets.
There are two remaining things to consider. The kid has to put in the time and sweat equity to make the bracelets. Additionally, the child has to come up with a marketing and selling plan. It sounds easy, but it wouldn’t be right to sell at school – we don’t want to distract from learning. Maybe it’s possible to sell at soccer or Little League games? You might have to check with the league and the rules on that.
Don’t Forget to Reduce, Reuse, Recycle
Ever since we watched the Curious George movie, I’ve been hooked on Jack Johnson music. It’s great for kids because there are no cuss words and the songs usually have an uplifting message. Jack Johnson is a champion of the environment. Check out this sweet video of him singing his song “Reduce, Reuse, Recycle” with some children. It’s not only great for the environment, but it helps save money too:
Recently, I wrote about how to teach your preschooler about money. It included a lot of basic things like recognizing coins have different values. Once they get to elementary school, they can start to tackle bigger money issues.
Before I get into the money part, I need to address one elephant in the room. There doesn’t seem to be a good name for children ages 6-10. They aren’t preschoolers and they aren’t tweens. I found a couple of places calling them grade-schoolers, so I’ll go with it.
One of the great things about this age is that you can do so many things that you couldn’t for a preschooler. Let’s look at some of the things:
Savings and Spending
By grade school, kids often have an allowance. That means they can make more of their spending decisions than a preschooler. My kids started to want more complicated things. Sadly, the days of decorating a big cardboard box like a rocketship and flying to the moon isn’t enough. They wanted to save up for a Nintendo Switch and the latest Pokemon games. Now I spend most of my time trying to pry them off of video games. That’s a topic for a different blog or article.
Unfortunately, with the example of the Nintendo Switch and Pokemon games, we couldn’t shop around and try to stretch a dollar. We got one a few months before COVID hit and considered ourselves lucky that we got one at all.
Earning Money
Grade schoolers can do extra chores around the house to make some extra money. My kids help out with the dog boarding business that I run at home. It’s only fair that I give them some money. Unfortunately, it’s uncommon that kids can reasonably help in your professional life.
There are other things that kids at the upper end of this age range can do. They may be able to babysit a younger sibling for a short time. They may be able to bake some pastries for a bake sale.
A lemonade stand may sound antiquated but it can work. Our area has limited the places where lemonade stands can be. I guess they didn’t want kids pestering the tourists. We run a virtual lemonade stand using a version of a lemonade stand game I played as a kid. This is a great way for kids to about supply and demand.
Other Financial Education
This age group is a great time to teach kids money with televsion. Some episodes of Teen Titans Go make learning about real estate investing fun. Other shows like Warren Buffett’s Secret Millionaire Club are greatly focused on personal finance.
Additionally, you can start to share the family finances with your kids. You don’t need to share everything, but you can share some of the necessary expenses that the family has.
When I was growing up, I didn’t know anything about the family finances. It was simply my job to do well in school and my best everywhere else. My father died when I was 13 and my mother invested the insurance money. I started to learn a little more about the family finances, but I still didn’t know much. Even today, I couldn’t tell you when my parents paid off the mortgage on the house.
I didn’t need to know the family finances, but I feel like I would have been more prepared if I had that information. I might not have taken for granted all the things that seemingly magically happened. In college, I might have understood the value of a dollar a little better.
I think it’s a good idea for kids to know some basics about the family money. They certainly don’t need to know the details.
I was trying to think of a way to show the kids roughly how we spend our money. My kids are 8 and 9 and they have a fairly good handle on place value. However, whenever possible, I feel like younger kids work better with smaller numbers.
That’s when I came up with an idea. What if I took our rough finances and deleted three zeros? Yes, I’m dividing everything by one thousand.
Here’s an example of what a conversation of what our family’s numbers might look like:
“Mom and I make about $200 a year. We actually make more than this and things cost more than this, but this is an example of where we spend money.
We spend about $40 in taxes. Taxes pay for libraries, roads, police, firefighters, and schools – many things that we share as a community. Many adults don’t like paying taxes, but everyone I know enjoys having these things.
We spend $40 to buy and maintain this house. We’ve been paying money to buy this house for ten years now. We have five years left. Then we won’t have to may so much.
We spend $25 to send both of you to the best school around. It’s so good it costs most people $50 to send two kids and they happily pay it. We get a discount because mom is in the military. Everyone has the choice to pay $0 for the public school – it is paid for by the taxes above. Those public schools are good here too. Some of your good friends go to public schools and they are great kids. It’s always important to try your best to do well at school, but it feels more important to us because we pay so much money.
We spend another $13 on cars and trains. Much of that was for when mom was in the office. Remember she’d spend the night in Boston so that she didn’t have to drive so much. Those hotels add up, but it gives her hours more of free time. With COVID, she’s been at home a lot more, so we don’t have to pay this much. We also own our cars just like we plan to own our house in five years. Most people make payments every month to buy their cars. There’s a lot more to car costs than the cars themselves. We have to pay for gas and to maintain them in case they break down. We also have to pay for insurance in case we, or someone else, get in an accident. Insurance is something we can talk about later.
We spend $14 on food. Half of that is food that we eat at home. The other half is food that we eat at restaurants. We don’t eat out at restaurants very often, but it costs a lot more. We get you those cooking classes so that maybe someday you can make restaurant-quality food from your kitchen at home. That would save a lot of money.
We spend another $5 on utilities. These are things like heat, electricity, water, internet, and phones. I’ve done a few things to save money on these things. The solar panels saved a lot of money. The new heater in the basement works a lot better than the ones they made 25 years ago.
We spend another $5 on other random stuff that we buy. Things like shampoo, toothpaste, shirts, pants, and shoes.
When you add up all these costs of things we get to $137. That leaves us with $63 left.
We spend money on a lot of other fun things. We have that zoo membership. We are going to do those bumper boats on ice. I don’t add up how much these things cost. They aren’t free, but they are fun. We spend another $10 on vacations. We spend another $5 on summer camps and another $3 on activities like karate and snow sports.
That’s $155 of the $200 spent, so we have about $45 left. We still have some other expenses here and there and the rest we save.
We’re making this simple for you and some of these numbers are estimates, but it gives you an idea of where our money goes and the decisions we make when spending it.
I haven’t had this conversation with them yet. Maybe they won’t care. Maybe they’ll find some of the stuff interesting. In any case, I feel it’s good to be prepared to cover that conversation if it comes up.
The only downside to this that I can see is if my kids think they can give me $3 and pay for a year of karate and snow sports. I don’t think it will too bad though. They have had some school exercises where one icon is equal to a hundred units, so five icons are equal to five hundred units. This is a similar exercise except that one dollar is equal to one thousand dollars.
I have two boys, one in the second grade and one in the first grade. My second grader is doing basic math with money at school, things like making change correctly. It’s certainly a good start, it is math disguised as adding and subtracting tens and twenty-fives. My kids learn more about personal finance when I take them shopping and show them how I compare unit pricing on a jar of spaghetti sauce. For the most part, I should be focusing on how to give your child an allowance.
Alas, two of my greatest interests in life are personal finance and my kids… I would inevitably try to combine the two. I can’t teach all personal finance through television. So when I heard that MoneyTime was an online class for teaching kids personal finance, I did a little research and reached out to them to find out more. Every week, I get a dozen or more companies asking me to pitch their product or service. This was one of the few times that I’ve reached out to the company. (You may have noticed that I review very few services.)
MoneyTime Review: The Overview
MoneyTime is designed for kids between the ages of 10 to 14. From their FAQ:
“We’ve found after testing that children below 10 years old found the math to be a little too complex and those above 14 found the graphics of the game to be too childish. That’s why this age range is perfect for MoneyTime.”
My 8-year-old is in challenge math classes at school, so I figure it was worth a shot. All year, he’s been getting extra instruction in school about how to work with computers just in case they have to go to home-schooling. That proved very helpful in getting him going with the basics of navigating the application. They were right about the math though. Early on, there were some multiplication questions. Armed with his Multiplication Machine, he was ready to go. I was always nearby, but he only called on me a couple of times. If I wasn’t a personal finance blogger (and a Tiger Dad) curious to push the age limits, I would wait until age 10 for the kid to get the most out of the classes.
The MoneyTime system is broken up into 8 major topics:
Topic 1: Earning, saving and interest
Topic 2: Employment
Topic 3: Managing your money
Topic 4: Borrowing money
Topic 5: Property
Topic 6: Investing
Topic 7: Business
Topic 8: Protecting your money
Each of those topics is broken up into 4-6 modules or lessons. For example, “Managing your money” has modules of Smart Spending, Budgeting, Banking, and Paying. I’m not sure that a 10-year-old needs to consider employment in topic 2, especially the “resume” module. However, I think it’s based on the outline of “earn, save, invest” in that order.
My son completed the first topic, so this review will be based only on that section. The lower right-hand part of the dashboard gives you a little view on how that went:
If you read from the bottom up, you can see my son got only 67% of the pre-test questions on earning, saving, and investing correct. I was very impressed by this pre-test because had little exposure to some of the topics. I had to remind him a couple of times that he wasn’t expected to know the answers. I used this opportunity to teach him how to eliminate some answers that seemed obviously wrong and then take his best guess of what’s left.
After a module of instruction, there is a 10 question quiz. He got 60%, 90%, and 80% respectively on the earn, save, invest sections. The invest section introduced the difference of compound interest vs. simple interest – a distinction he still talks about today. When it came to the final review test on the topic of saving, earning, investing, he scored a 93%. I expected some improvement because he was learning the material on the test, but this was outstanding.
MoneyTime Keeps Kids Motivated
You may have noticed that my son has an avatar of a weird orange bird superhero. He likes fire-type Pokemon and my theory is that this most closely resembled Blaziken – the fire chicken.
You can spend your earnings (which come from completing modules) on improving your avatar. This was an important motivation for my 8-year-old. He also made investments in education (the stack of books) and investments (the treasure chest). The education helps him earn more as he completes more modules, he’ll earn more. This seems to be a little like the game of life where having a good career helps you earn more from the “Pay Day” spots on the board. His current job as a “trainer” earns $1000 a year. His $5,500 savings is enough to upgrade to Carpenter that would give him a 50% raise per year ($1500).
It’s not clear to me how years pass in this world, but I think it’s because we stopped where we did. My son did one topic (the three modules) over two days during school break. He hasn’t gone back to it since then. I don’t think it is because MoneyTime didn’t have the staying power. Instead, my kids simply don’t have a lot of time with school/homework/karate/cub scouts/etc. I want them to have some unstructured time as well. We should revisit it over the summer. He’ll have more free time and be almost 9 then.
MoneyTime Review: The Conclusion
I gave you our experience with MoneyTime, but I think the company’s professionally-made, less than 90-second, video shows off a little more from a different perspective. It’s worth the quick watch:
There are a couple of online courses for kids and personal finance, but this is the first one I’ve tried. It works very well. Then again, kids’ personal finance education is non-existent, so the bar is very, very low. When I think of what we spend on karate/skiing classes and specialty camps, the value of this education is way, way, off the charts.
This link will give you 25% off bringing your annual membership to $49. That price is current as of this writing (1/26/2022). They have a deal going on now. The pricing used to be $99 a year. If you think it’s something that you might be interested in, I would buy it now. In the interest of full disclosure, I should mention that the company will give me a commission on sales.
