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Kids and Money: Interest

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 [3] 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 [4]. 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 [5]. 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?