The Compound Interest Clock – The One Lesson Every Kid Should Learn
“Start teaching your kids early about money and the importance of saving…compound interest…thinking in percentages…Understanding money like this can influence how people save and spend.”
Sam X Renick, Men’s Health Magazine, June 2015
Compound interest – do you hear it? Tick tock. Tick tock. That is the sound of the compound interest clock.
One of the biggest lessons every kid should learn about compound interest is, the compound interest clock NEVER STOPS!
That is important because it means compound interest is always working for or against you. And, the younger a person is and the further away they are from their goal, the more compound interest is working for or against them.
If a person is saving and investing money, compound interest is working for them.
If a person is paying interest on any debt, compound interest is working against them. AND, this is what is really important to kids and their parents, if they are delaying to save and invest money, compound interest is working against them.
Why? Because it is not working for them. The principle, reminds me of the famous Mark Twain quote,
“the man who does not read, has no advantage over the man who can not read!”
One of my primary influences on great money habits is Benjamin Franklin. This is what Franklin says,
“Remember, that time is money…Remember, that money is of a prolific generating nature. Money can beget money, and its offspring can beget more, and so…”
Tick tock. Tick tock. Please share with kids, the compound interest clock is always ticking. It never stops. It is always either working for or against them.
Illustration
To help illustrate the point, ask kids and their parents a question like – how much compound interest does a person surrender by delaying to save or invest the equivalent of the cost of one soda per month over fifty nine (59) and sixty (60) year periods of time?
Example 1 – Five percent (5%)
Amount Used on Soda: $1.50 monthly for 60 years
Total Amount Used on Soda: $1,080
Total Amount if Money Earned a 5% Return Compounded Annually = $6,855.51
Lost Compound Interest = $5,775.51
Amount Used on Soda: $1.50 monthly for 59 years
Total Amount Used on Soda: $1,062
Total Amount if Money Earned a 5% Return Compounded Annually = $6,504.60
Lost Compound Interest = $5,442.60
Delta: One year delay at 5% interest: $332.91
Example 2 – Ten percent (10%)
Amount Used on Soda: $1.50 monthly for 60 years
Total Amount Used on Soda: $1,080
Total Amount if Money Earned a 10% Return Compounded Annually = $71,244.32
Lost Compound Interest = $70,164.32
Amount Used on Soda: $1.50 monthly for 59 years
Total Amount Used on Soda: $1,062
Total Amount if Money Earned a 10% Return Compounded Annually = $64,474.18
Lost Compound Interest = $63,412.18
Delta: One year delay at 10% interest: $6,752.14
Reading and Resources
Sam X Renick: More on Compound Interest
Budgets are Sexy – J. Money: The Power of Compounding
Get Rich Slowly – J.D. Roth: The extraordinary power of compound interest
Marketwatch – Paul Merriman: Make your kid rich for $1 a day
Credit.com – Gerri Detweiler: 3 Ways to Make Your Kids Millionaires
Itsahabit.com – Sam X Renick: How to teach compound interest
Family Math Night – Karyn Hodgens: How to teach kids compound interest (Grades 5 to 8)
Bankrate.com – Savings Calculator / Compound Interest Calculator
Sadly, until banks & credit unions are forced to pay more than tiny fractions of 1% on savings and to stop punishing savers with high fees and minimum balance requirements, what kids (and adults) learn from studying compound interest is that it only works against Americans of modest means. The traditional benefit for generations of savers is gone. Killed off by the Federal Reserve’s ultra low-rate interest rate policies that fueled the mortgage frenzy that produced the Financial Crisis and that prolongs the pain of the elusive recovery.
Jim, thank you for your thoughts. I have to disagree with portions of your thinking. Are interest rates an incentive to save? Certainly. But they are not the only reason to save. If people, particularly kids, aren’t educated early on the benefits of saving, they will just fall further behind. Learning to save is a foundation and springboard to asset accumulation. Once kids begin saving, many, perhaps not all, attitudes toward and relationship with money will change. I know it did for me. They will then begin to ask themselves other questions like how long will I be saving or investing for? Where can I earn better returns related to my goals, etc. From my perspective, it’s a process and learning principals like compound interest is an important part of that process.