EXPLAINING COMPOUND INTEREST AND SAVINGS WITH A PIZZA
Growing up, I didn’t have a great set of financial examples in my life. As a result, I trained myself to manage money well, and committed to ensuring my two boys were armed with at least the basic tools needed to ensure a certain level of financial responsibility.
This past Friday, when my 6 year old saw me in the office managing some of our investments in my office and asked “what are all those numbers?”, I stalled a bit. Will he understand stocks, exchange traded funds, bonds, 401K etc…? Probably not, but the common element joining most financial investments is the idea of “earned or compound interest”. I figured, yes maybe this is a bit deep for the guys, but probably important for them to learn sooner than later. Heck - even if my 6 year old isn’t technically managing money, he’s experiencing the concept of “value” every day in his life, simply by making decision on the playground, in class, with his friends and beyond. What follows is really just my own, non expert, experience in introducing my kid to the idea of financial wellness.
First thing’s first, I showed my oldest son my basic checking and savings account page on the internet. He’s good with math and understood numbers, so it was just a matter of helping him understand that this is a much bigger, vaster version of his piggy (or in his case “Owl”) bank. Where based on which Owl bank you used, more money would deposit into that owl bank based on “compound interest”.
Wait - what the hell does he know about compound interest? He’s only 6 years old!
When trying to teach our young children about the value of compound interest – or the time value of money - one possible way to start is by associating the concept with earning more of something they really really like. In my 6 year old’s case it’s Pizza!
‘Compound interest’ simply means earning interest on your savings and also, eventually, on the interest that those savings earn. The earlier you begin to save, the more compound interest you will earn. An adult example would be, say, $1,000 to save. Investing that $1,000 at an interest rate of 4% p.a. means that at the end of year one, you would have $1,040. During year two, you would be earning interest on a balance of $1,040 – or in other words, earning interest on both your initial savings plus the interest that those saving have already earned.
That example was maybe well above my kid’s pay grade, but here’s how I walked through the idea with my little guy…and spoiler alert - HE TOTALLY GOT IT!
Give your kid a slice of pizza at dinner one evening. Ask them how long they think they could go before eating it. Offer to give them an additional slice of pizza for each day they don’t eat any of the pizza they receive. This helps the little ones understand the concept of reward for patience, or what we call in money terms - “savings”.
Then have take the whole pie of pizza and place numbers around the pizza - just like a clock. 1 to 12. Have them count around each hour until they reach 12, as they reach the final hour ask them to count how many new pizzas they earn - they quickly associate the value of “time” with “earnings”. For me at least, it was quite remarkable watching the entire concept of saving come of his face.
Then maybe expand the lesson with coins. Give an initial small amount of money to your child (two dimes or 2 quarters should do) and offer to add to the amount each day for as many days as your child can continue to save. Gradually increase the daily amount that you provide (for example, ten cents, then fifteen, then twenty) to mimic compound earnings.
Finally, even though my guy is only 6 years old, and my youngest is 2, I still decided to explain to them both that money in the bank earns interest and that money invested in a savings account works in a similar way; that the earlier my guys saved, the more compound interest they can earn. Immediately, I mean immediately after - me and the wife packed up both boys…took them to a local bank… and had them sign up for their own personal checking and savings account. Crazy thing is, they couldn’t wait after thinking about all that pizza they could have if they saved it and waited for a bit!