One of the best gifts that we can give kids is financial knowledge. Becoming financially healthy at a young age can help kids avoid some of the financial mistakes that many of us have made (and that we’re still learning from).
For example, if we had known then, what we know now, the majority of us wouldn’t have so much debt (the average American has a total debt of $135K), we’d be better prepared to fund an emergency (less than 65% of Americans have $1,000 in savings) and we’d have more saved for retirement (52% of Americans have less than $10,000 saved for retirement).
Teaching kids the following key concepts can help them become adults who spend and save wisely (and may help you become a better spender and saver too).
Teaching Kids about Budgeting, Saving and Compound Interest.
Budgeting and saving money are the most important aspects of having a secure financial foundation. Depending on the age of your child or teen, there are many ways to teach this. Giving your child opportunities to earn money through chores so that they can begin to manage their own money is a great first step. Then, with a piggy bank or savings jar, they can watch their money accumulate. Another great way is to open a savings account at the credit union.
One key concept of saving is time. The longer money is saved, the more likely it is to grow – especially when there’s interest.
One fun way to demonstrate the power of saving and compound interest is to ask, “Would you rather have $10,000 or a penny a day, doubled for 30 days?”
Starting with one penny, doubled for 30 days, totals over $10 Million!
|Day 1||$0.0200||Day 11||$20.4800||Day 21||$20,971.5200|
|Day 2||$0.0400||Day 12||$40.9600||Day 22||$41,943.0400|
|Day 3||$0.0800||Day 13||$81.9200||Day 23||$83,886.0800|
|Day 4||$0.1600||Day 14||$163.8400||Day 24||$167,772.1600|
|Day 5||$0.3200||Day 15||$327.6800||Day 25||$335,544.3200|
|Day 6||$0.6400||Day 16||$655.3600||Day 26||$671,088.6400|
|Day 7||$1.2800||Day 17||$1,310.7200||Day 27||$1,342,177.2800|
|Day 8||$2.5600||Day 18||$2,621.4400||Day 28||$2,684,354.5600|
|Day 9||$5.1200||Day 19||$5,242.8800||Day 29||$5,368,709.1200|
|Day 10||$10.2400||Day 20||$10,485.7600||Day 30||$10,737,418.2400|
Of course, no investment doubles daily, but this is a good way to explain the basic concept of compound interest, which allows the saver to earn interest on interest as opposed to just interest on principal (simple interest).
Teach Kids About Debt.
It’s important to steer your kids in the right direction by teaching them “good debt” vs. “bad debt.” Kids should be encouraged to live within their means. And, it’s important to explain interest. Just as compound interest helps some savings plans grow, it can also cause debt, such as credit cards, to increase.
One of the best ways to help kids become financially healthy is to lead by example. Be honest about the mistakes that you’ve made and use your own experiences as teaching opportunities to help train your child to be financially smart.