Teen Money

Four Ways to Teach Compound Interest

Teach Compound Interest
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:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

Week’s Best from Kid Wealth (#3)

It’s time for another week’s best. Usually, I like to highlight different happenings around the kid financial literacy space. Today, I’d like to take a deeper dive into just one aspect of kid financial literacy. It may be the most aspect.

High School Financial Literacy Courses

More and more states are requiring students have some kind of financial literacy course to graduate high school. This CNBC article suggests that Georgia and South Carolina will be requiring financial literacy soon. There are a lot of politics dividing the United States lately. One area that seems to get bipartisan agreement is kid financial literacy.

It’s almost shocking that it took everyone so long to get on board. My only thought is that everyone always knew that kid financial literacy was important – they just had other education priorities. Obviously, I’m a fan of kids learning this important skill.

I’m going to ask you to stay with me on this next one. It’s useful for everyone here in any state, even though I’m focusing on one.

Rhode Island Financial Literacy

The news of the week was actually in my neck of the woods – Rhode Island. Last June, a law was signed here to create, develop, and approve academic standards “for the instruction of consumer education in public high schools.” As part of this, schools have to create courses and require “all students demonstrate
proficiency in consumer education prior to graduating high school.”

The actually “weekly news” is that Rhode Island launched a Financial Literacy Resource Page… and it’s awesome!

For example, with the high-school literacy outline, there are links to resources that are “non-commercial, research-based, standards-aligned, and include teacher training, instructional materials, and assessments.”

It’s quite literally everything that you might ever need to teach kids financial literacy. The only thing that’s missing is that awesome teacher to make it fun and interesting. There’s nothing specific to Rhode Island in many of the resources. There’s even a financial literacy proficiency quiz. I took the demo and it isn’t easy.

What do you think? Is my Rhode Island tax money being put to good use? (I think so.) Can you take advantage of those tax dollars even if you aren’t in Rhode Island? (Quite possibly.)

American Girl: A Smart Girl’s Guide to Money (Book Review)

American Girl: A Smart Girl's Guide to Money

American Girl is a strange brand to put out a guide to money. Some of their dolls cost hundreds of dollars. That’s before you get into the extra clothes and accessories. My wife sold five of her niece’s American Girl dolls for around $500. They were used, without the boxes, and in some cases not even in the original clothes. Back when the nieces were in their American Girl phase my wife saw the prices on the accessories in a catalog and quipped, “I hope you get an American job that pays American money for this stuff.”

I have to admit that when we found out that we having were boys, a part of me was relieved to not have to get drawn into that consumerism. Instead of American Girl stuff, my kids got drawn into Pokemon consumerism. I don’t know if that’s any better.

When my wife saw the book, American Girl: A Smart Girl’s Guide to Money by Nancy Holyoke, we joked that it must be one page long with only four words, “Don’t buy our products!” However, it was used and only a couple of dollars. Curiosity got the best of me, so I bought it. The copy I have is the original version from 2006 and that link is to the revised version that’s in print today. It has a different illustrator, but the same author. Using Amazon’s “Look Inside” feature, it seems like the content itself is the same and the illustrations are just as good – it’s just a different style.

So, with two boys and no daughters, I’m going to attempt to review a personal finance book for teenage girls by a company that sells outlandishly priced products. None of this makes any sense, but this is where we are.

To start, the book isn’t one page and four words long. It’s 95 pages, with colorful illustrations on every page. It’s the perfect presentation for a teenage audience. I can’t emphasize that enough, because getting kids to choose to read about personal finance is not easy. A teenager will plow through this book quickly. I’m tempted to ask my 9-year-old son to read it, but I know it would have be a big bribe – teenage girl books are weird for 9-year-old boys. I’ll give it a try anyway – chocolate usually works. Also, it would give me a chance to put a few dollars in his how to teach kids about money. Finally, there is a page about the power of compound interest.

The book closes out with a few pages on donating to charity. It also included one page about how $20 can mean different things to different people and even different things to you based on how you acquired it and what the expectations were. This particularly resonated with me. I can spend hours writing an article for this site. A dollar earned here means much more than a dollar earned in salary.

American Girl: A Smart Girl’s Guide to Money isn’t a complete guide. For its intended audience, it is close to perfect. It teaches just enough without getting too long and complicated that teenage girls would simply not read it.