That’s the power of interest — and it’s a valuable lesson for kids to learn early in life.
Research shows there is a link between a child’s self-control with money and their future financial health. When kids develop a compulsion to spend (Exhibit A: the candy aisle at the grocery store), these habits can lead to problems with money and debt as adults. On the other hand, when kids learn to delay gratification by saving for a longer-term purchase, this behavior creates financial confidence later in life.1,2 Teaching your children the value of interest — and showing them how it compounds over time — may go a long way in helping them develop a healthy relationship with money.
You may already give your children chores to do in exchange for an allowance. Perhaps you also designate part of what they earn into a savings account for college or another future expense. Yet, in order to really learn a lesson, it helps to experience it firsthand. These home activities may help you teach your kids about growing their savings with interest over time.
1. Add interest to your child’s allowance
Say you give your child a weekly allowance. Tell them that for every $1 they put into savings out of the allowance, you’ll add $0.25. At the end of each month, go over with your child how much they put into savings and how much they earned in interest. You can track this activity over a year so they can see how substantial their earnings have been.
2. Take out a “loan” from your child — with interest!
One way to teach your child about interest is to borrow money from them and pay it back with interest. When you pay it back, talk to your child about why you are paying them back more than what you borrowed: that it costs money to borrow money!
3. Loan them money (yes, with interest)
Another activity is to flip the loan experiment around. When your child asks for a big-ticket item, you can lend them the money — with interest, of course. Help them set up a repayment plan, with an option to work off their debt faster. Give them the opportunity to work harder, pay it back sooner, and pay less overall for their item. Don’t be afraid to get creative. And most importantly, make sure to stick to your terms.
4. Share your own borrowing and savings stories
Talk about how you pay interest on things like a house and a car because you had to borrow money from the bank in order to buy these bigger items. You can then share about how being responsible with your money, such as paying others back quickly and not borrowing more than you need, will help you pay less for these big items over time.
5. Help them visualize bigger purchases
Encourage your kids to write down what they want in time. Or draw it. Talk with them about how they will reach this savings goal and how interest will boost their savings. Having a poster in their room, for example, of the game console they want to buy will remind them that they are working on a long-term goal. Then when they want to compulsively buy something, mention the poster to help keep them on track.
6. Explore opportunities for learning about money
Look for other opportunities to practice financial wellness with fun activities. Show kids how being conscious of everyday expenses can translate to savings and more. Continue to have conversations around interest rates to help your child grow their savings and make better choices for their financial future. Consider taking your child along when you visit a financial advisor, to see what building a long-term strategy really looks like!
Teach your children the benefits of working with a financial advisor.