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!