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Kids and Money: Interest

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Interest has a big impact on your finances, as you well know. However, interest is a foreign concept to most children. It can also be somewhat difficult to teach. If you want your child to grow up to make better decisions — earning interest rather than paying it — this is a concept that needs to be addressed.

While it might be a bit much to teach toddlers about interest, I have found that my eight year old son is capable of getting at least a glimmer of the concept of interest. We first started talking about it during Monopoly. My son has discovered that he loves Monopoly. At first, he thought mortgaging property was great. Instant money! But I pointed out to him that a mortgage had to be paid back with interest. I explained that interest is an extra fee you pay because you are really “renting” money that isn’t yours. After paying an extra 10% interest to discharge his mortgage (he was tired of not earning any money when someone landed on his mortgaged property), he got the idea. He has done his best to avoid borrowing in Monopoly ever since.

Some other things you can do to teach kids about interest include:

Show Them Your Interest

If you have debt, you can talk about how you regret it, and show them your credit card statement. Since the Credit CARD Act was passed, creditors have to put how much you will pay back at the end. Show your child how much more you are paying back, thanks to credit card interest. It can be a powerful lesson, and teach your child to learn from your mistakes. Even if you aren’t interested in revealing that much about your finances to your children, you can find other ways to get the point across.

Borrowing and Lending

If you give your child an allowance, you can illustrated interest by allowing them to borrow from you — if they pay you interest. You can work out a payment plan, and show them that if they use your money for a purchase, they will have to repay more. Make sure your child understands that whenever they borrow money, it’s not free; there’s a charged attached.

You can also emphasize the idea of earning interest. Borrow a few dollars from your child after he or she has built up some allowance. Then, a few days later, return the money with interest. Show your child how interest works both ways, and how it is possible to earn interest when you use your resources wisely.

High Yield Savings Account

Help your child set up a high yield savings account. Periodically deposit money in the account with your child, and then show him or her how much interest is being earned. You can even go online and help your child find higher interest yields. I have a 529 set up for my son. Even though he doesn’t really understand investing, he does see that the money on the 529 statement exceeds what has been invested. He can see that there is a return, and that compound interest is working in his favor.

What ideas do you have for teaching your kids about interest?

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5 Responses to “Kids and Money: Interest”

  1. DIY Investor says:

    I think the best thing is for them to have a savings account as you suggest and see the interest they have earned. Unfortunately, today savings accounts don’t pay very much.
    The story is that interest started with farmers helping each other. One farmer loses livestock because of a fire or something else and a neighboring farmer helps by lending some cows. Then the cows have babies and the farmers had to pay back not just the original cows but the babies as well.
    Interestingly Ann Landers (the advise columnist)got more mail than for any other offered advice when she advised a questioner to not charge interest to her son for lending the down payment for a car.

  2. Dave says:

    I’m pretty sure I learned about intestest at a fairly young age, but I didn’t really understand the power of it, particularly compounding interest until some time much later (probably around the time I had a college finance course where I learned about net present value, future value, and all other other calculations that really show you the impact of interest on your savings).

    Now, if I can teach my toddler about NPV and she actually understands it, I think I might have the next Warren Buffett on my hands… but I’m pretty sure that Mickey Mouse Clubhouse or the Wonderpets don’t teach finance :)

  3. Shirley says:

    Most pre-teens struggle with abstract ideas but respond well to tangible or visual lessons. I have used play money and clear plastic jars with youngsters to track and teach interest, both earned and paid.

    For one visual-learner teen an excel spreadsheet with colored cells worked best. It had green for “your money”, gold for “interest earned”, blue for “borrowed money” and red for “interest paid”. That really got the idea across to him!

  4. While I do agree that it’s important to teach your kids about interest, I am very much against the recommendation of allowing them to borrow money from you to make a purchase. I really don’t like the idea of teaching them that if they go to the store with less money than is needed to buy what they want, that they can just ask for more money (the equivalent of whipping out a credit card).

    • Shirley says:

      All kids need to learn that there are consequences for actions and that they must take responsibility for them.

      I think that if a child borrows money (the equivalent of whipping out a credit card) and bears passing up other wanted things while paying it back, it is a lesson that can have a far-reaching positive result. It is far better to learn the possible pitfalls of credit cards and borrowing while they are young, than to have to experience a heavy burden of debt later when it could be life-changing.


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