Guest blog post by Damaris Olaechea, NerdWallet
As a parent, one of the most important life lessons you can teach your children is how to manage money. Unfortunately, some of the most important lessons aren’t the most fun or easiest to learn. This happens to be the case with learning about interest. Not only do kids have little interest (pun intended) in listening to a boring lesson about interest, the concept can be difficult to grasp. That’s why it’s especially important to teach your lesson in a way that’s fun and makes an impact.
Keep in mind that experts say that it’s best to teach your kids about interest between the ages of 6 and 8. The following activities for children within that age range will help you explain compound interest in a relatable and effective way:
Grant a loan
If you don’t already give your child an allowance, start doing so to help him or her build up a bit of savings. When they want to buy something slightly out of reach, grant them a small loan to fund the purchase. Charge an extra few cents for every dollar borrowed, and continue this practice each week until the loan is paid back in full.
Be sure your loan is small enough that your child can use the allowance to successfully pay you back within a reasonable amount of time. You want them to get the point, but you don’t want them to stress out or fail, and you definitely don’t want the lesson to drag on for too long.
Ask for a loan
This lesson is basically a reversal of the one above. Instead of lending your child money, ask them for a loan. Be sure to outline the terms of the loan clearly. For example, let them know you’ll pay two cents for every dollar of the remaining balance each week until the loan is paid in entirety.
This activity allows your child to see things from the perspective of the lender. It also prepares them for a savings account, since they can experience how fun and profitable it is to set money aside and watch it grow.
Review your monthly statement together
Sharing your personal experience is an excellent way to teach your child about interest. The next time you receive your savings account statement, share it with your child. Point out the difference between the amount of money you actually put in the account and the total you’ve earned with compound interest during the month and year-to-date.
Your kids really look up to you, so seeing that you’re saving money and are enjoying the benefits of compound interest will really make an impression.
Establish good habits early on
If you present compound interest as something that’s fun to learn about, your kids are going to want to join in. Be sure to make it a point to discuss compound interest early on and spark their interest in saving money (and earning interest) at a young age.