Teach children to save by helping them discover the insane-coolness of compound interest with this money activity
Compound interest − a phenomenon that you want to get cozy with − can be an abstract concept for your child.
Heck, it can be an abstract concept for us Mama Bears!
But it works whether anyone understands it or not. How cool is that?
Still, we want your child to get into the über-awesome habit of saving gobs of money for the rest of their lives, so we need them to discover the coolness of money earning its own money.
Here’s a trick for how to teach children to save: let them discover their own money earning its own money. Which of course, then, becomes part of their money.
Pssst: pay attention to how often your child’s savings account compounds; if you’re just setting up bank account for baby, then you’ll want to find one that compounds monthly or even daily for the most amount of earnings.
Money Activity to Teach Children to Save: Play Compound Interest Detective*
Detective Step #1: Gather two consecutive statements representing two compounding periods from your child’s savings account. So if the account is compounded monthly, gather two months’ worth of statements. And if your child’s account is compounded quarterly? You’ll need two quarter’s statements. Annually (yikes, you’re missing out on compound interest earnings over the long haul with this kind of setup)? Get two annual statements.
While seeing their statement online is cool, printouts are even better. Print it out if you can find it online, or call the bank and ask them to send you one by mail/email.
Detective Step #2: Have your child dig into the two statements for a few nuggets of information. They want to find and then highlight both the starting balance + the ending balance (after interest was added) on each statement.
At the bottom of each statement, if it’s not a line item somewhere, have them write down how much interest was earned (by subtracting the ending balance from the starting balance).
For example, let’s say they have $250 in their account at the beginning of the first statement’s month, compounding monthly, at 0.75% APY. It would have earned $1.56 in that first month, bringing the ending balance to $251.56. Then in the next month, the interest is calculated on $251.56 − not just the $250 − so it will have earned $1.57 instead of $1.56. Which then, of course, gets added onto the principal to become $253.13 for the following month.
Detective Step #3: Ask your child why their money earned less during the first month’s statement and why it earned more during the second month’s statement (so in the example above, why did it earn $1.56 in month 1, but $1.57 in month 2?).
They likely won’t know the answer. Cue your “compound interest” discussion.
Mama Bear Cliff Notes: Teaching your child about Compound Interest giving you a headache? Skip the sit-down and have your child watch Camp Millionaire’s video on Compound Interest instead (9:02 minutes).
Detective Step #4: Have your child do some further detective work and find out how often their account’s interest is compounded. If you can’t find the information in the teensy-weensy font at the bottom of your bank’s page, then just make a phone call and ask someone.
Bonus points that you show your child how to be proactive with finances by getting an answer!
Detective Step #5: Have your child input their savings information into this calculator to figure out which is a more advantageous way to earn money: compounded daily, monthly, quarterly, or annually?
- Open up the calculator. Fill in the current amount you have in savings for the “initial investment” amount. Then $0 for the “Contribute” amount, and then fill in the number of years left that they have until they take over the account (typically at age 18 or 21, depending on the state you live in) in Step #2. For Step #3, fill in their current savings account APY, but leave the “Range of interest rates” field blank. Finally, have them pick “Annually” for Step #4. Click “Calculate”.
- Record the amount that your money will have earned.
- Repeat the above steps three more times, only replacing Step #4 each time to “semi-annually”, “monthly”, and “daily”, then clicking “Calculate”.
So for the example above ($250 initial investment, earning 0.75% APY, with 10 years to go), here’s how it plays out with the different compounding methods:
- Annually: $269.40
- Semiannually: $269.43
- Monthly: $269.46
- Daily: $269.47
Detective Step #6: Ask your child which is the best way to have money compounded (and by “best” I mean have them choose the compounding method that will earn their money the most amount of money).
Mama Bear Note: you really want to play up the fact that this is without your child adding one extra cent to this account. The savings just grows on its own!
Optional Detective Step #7: If your child is not entirely impressed with their approximate $19.40-$19.47 interest earnings (or whatever theirs comes out to be), have them fill in whatever amount they would like as the initial investment amount…sky is the limit. And of course the greater (or in this case, “larger”) their imagination, the more compound interest will come through.
I’d love to hear about any “aha” moments your child has as well as questions in the comments below!