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Teach Your Kids Personal Finance

March 27, 2011

Oh the places you'll go!

Last month I went and visited family in Walsh, Colo. It is about a five-hour trip each way, and not one of top 5 vacation destinations in the state. That being said, it was a really good trip. We went to Walsh to celebrate my wife’s niece’s sixth birthday. While there we also got to watch the Walsh Eagles basketball team, coached by my brother-in-law, defeat Kim, Colo. We also watched our nephew play basketball at halftime of the girls’ basketball game and we ate a good chicken fried steak meal to support the Walsh senior class.

Being a personal finance enthusiast, I thought about money during the trip — particularly teaching children early in their lives about the importance of saving. The thought came to me during the birthday party when our niece, among lots of presents of toys and clothes, received one card with money in it: A $10 bill.

Our niece wondered what she could buy with it. She wanted my wife to give her a list of possible of options of things to buy. My wife, who I must have trained well, suggested she save it, explaining how saved money grows into more money over time. The little girl’s mother suggested putting it in her college savings fund, a good choice for a child with three siblings. But the niece was not interested in either options. She wanted to buy something with it.

We are trying to teach our daughter early on about personal finance and the importance of saving. Whenever she receives money as a gift, we immediately put it in her savings account. As she understands where this money goes, she will begin to grasp how this money will build over time and help her down the road.

I hope you also teach your children and grandchildren about personal finance. It is not a topic that is covered in most schools in-depth, so if children do not learn it at home they probably never will in their formative years.

I received an article in the mail recently that illustrates activities you can do with children to teach them about personal finance. They come from Andrew Tobias, author of the book “The Only Investment Guide You’ll Ever Need.”

The first activity teaches the power of compound interest. When opening your child’s first savings account, give them a dollar in a cookie jar. Then, tell them you will give them 10 percent on that $1 every day. For the first day, they would receive 10 cents, then on the second day, they would have $1.10, so they would receive 11 cents, and so on.

At the end of one month they would have $17.45, and if you went two months, they would end up with more than $300. Now, you would have to inform your children that good investments receive 10 percent growth a year, not in a day. Even with that fact, by keeping track of the growth on a daily basis, it can show them how compound interest can benefit them. When you leave your investments in a good growth category for a long time, the benefit comes when your money can grow on itself.

To illustrate the power of time, try another game with two kids. Give each kid a dollar with the option to buy a bag of candy or start saving at 10 percent a day. Let one child buy the candy and have the other start saving, giving 10 percent a day. For the child who bought the candy, give them another $1 three days later to start investing.

At the end of two months, the one without the candy will once again have more than $300. The one who had to wait three days after buying the candy will only have $228. That three-day difference cost the child more than $70 in two months. This can show all of us the power of waiting to start our investments. Sometimes we have to delay the purchase of candy, or for adults things such as vacations, a larger home or a new car, to be able to start building up a retirement fund to benefit from compound interest.

The final game with the dollar bill and a cookie jar can show the power of credit cards to destroy your wealth. Show your children what would happen to $1 if it got 20 percent interest every day. You can explain this is what you may be paying on a credit card. After day 19, the 20 percent $1 has $32, as opposed to $6 at 10 percent. After 35 days, the 20 percent cookie jar would have $590 as opposed to $28 in the 10 percent jar.

Then you can ask them which one they would rather be. Do you want to be the one who is saving and growing his or her money, or the one who is paying an extra 20 percent of credit card debt? This can be a power lesson for a child or even an adult, as there are many adults who struggle with the same concept. When you can speed up time, it is easy to see the power of compounding, time, and credit card debt.

There are a lot of lessons we can teach our loved ones while they are little, which will make a big impact on their lives. It will not be too long until my family makes its next trip to Walsh to celebrate another birthday. Then, before we know it, our own daughter will be grown. My hope in the time we have left with her is that we can teach her, along with a lot of other lessons, how to be responsible with her money so her money will go to work for her … not keep her in bondage as many people find themselves with their personal financial situation.

 

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