Compounding Interest and Your Kiddos: Yes, They’ll Get It

One of the greatest gifts a parent can give to their child is a head start on money management skills. No, money won’t buy happiness. But money opens doors to opportunities that will help your children grow happier as they grow up. Obtaining an education. Broadening one’s worldview with travel. Giving to causes they believe in. These all require money.

I imagine it’s difficult to look at your child and think they need financial skills at this age. But they do. Think of it this way: we teach our little ones to read not because we want them to read Moby Dick at age four, but because someday they’ll need to know how to read complex materials. This is why we start with Goodnight Moon.

Managing money wisely is all about establishing positive financial habits as early as possible in life. The sooner those are instilled, the sooner your child will be able to build upon those skills and understand more complex financial concepts as they grow up.

One concept your little ones can grasp if presented simply is compound interest. Start with pennies. Have them put a penny in a jar each week. I suggest each week because the frequency helps it become a habit. At the end of the month, you put in three pennies in and explain that money saved earns more money. There’s no discussion of the Dow Jones needed. No talk of trades or treasury stocks. Your kids will see that one penny turned into four pennies and four is better than one. Instilling this knowledge at a young age will help them actually understand how compound interest works the first time they hear it discussed in technical terms.

For more great ideas about how to talk with your children about money, please check out our Verity Credit Union blog post on talking to children about money.

About the Author

verityportraitVivian Valencia currently serves as Director of Community Relations for Verity Credit Union. Her 16 year tenure with Verity includes working with consumer & business lending, financial coaching & education and community engagement. Vivian was previously a personal finance education specialist for the former Consumer Credit Counseling Service of Seattle where she taught money management and credit education courses.

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