As my daughter continues to grow, one of the coolest things, I believe, is the fact that she absorbs everything, and I mean everything. My wife used to spell words (an old and useful teacher’s trick) to be able to tell me things without our kids finding out what the heck we were talking about.
Of course, I have to spell the words 75 times in my head, and sometimes ask my wife to repeat slowly, to be able to understand her. But as of lately, we can’t even do that anymore, because the kids are catching up to us (QUICK!!)
It is the coolest thing to see how kids learn so many things, so quickly, and are able to remember most of it. I guess their developing brains, just soaks information like crazy. Click To Tweet A little while ago, I started teaching my daughter Spanish (something I wanted to do, but it never works out that way for whatever reason) and she is kind of confused by the whole thing. 2 languages that are different, some words are similar, but still mean different things, etc. In any case, let’s just say, we are working on it (on her terms, slowly) and I am ok with that.
The point is that as a father, I am always looking for new things to challenge her soaking brain. I bought a telescope the other day, and we looked at the moon and the stars, and she was fascinated by it. I also started teaching her how to play chess, and we try from time to time to do homemade experiments I find on Pinterest, that are easy and fun.
However, when it comes to finances, I am having a hard time teaching my daughter certain principles. She knows the basics like don’t waste, be generous, save, help others, etc. They are all good things for the kids to know and for the parents to model that for them from an early age. But I want to teach her cool financial principles that she will have fun with.
Recently, I was browsing online, and I came up to an article about 5 things that kids should know about money (I always like to read those to see what I can learn.) It was very basic, and I appreciated the ideas in it. It was very similar to one I wrote a while ago (3 financial myths defeating our kids today) As I was reading, I realized that there is one thing that most articles about kid’s finances are lacking. It is the rule of 72.
Maybe part of it is because ‘interest’ is a hard concept to explain to young kids. For example, the mint.com has a great article about explaining interest to a kid. It basically explains that Banks (or financial institutions) pay you money when you give them your money to use. Simple, but to the point.
If you are interested in the full article you can find it HERE.
That gave me an idea: an article about the rule of 72. Now, it sounds complex, and some adults don’t even know this principle, but it is a simple rule used in the financial world to know how long it will take for you to double your money, using compound interest. (Here is a compound calculator for kids).
Get it? No? Ok, no worries! Let’s explain the rule of 72 with an example.
Let’s say you have $100 in the bank. And you want to know how long it will take for those $100 to double (or to become $200). Well, for you to discover that time frame, all you need to know is what is the interest that the money is earning. Let’s say that money earns 10% (for simplicity.) Well, now all you need to do is to apply the principle.
The principle is as follows:72 divided by (the interest rate), equals the number of years it will take to double (in this example with 10% it takes 7.2 years!!) This means that $100 at 10% interest will take 7.2 years to become $200!! Simple and to the point. Click To Tweet
72 / Rate of return (Interest rate) = Number of years for your money to double
If the interest rate was 12%, in the same example, your money will double in 6 years, and if the interest was 18% it will double in just 4 years!! This is why it is so important to invest money during your youth (to take advantage of the power of compound interest) and at higher interest rates. 1 or 2 percent you save will make the difference in the future.
Let’s use a better example. Let’s say you are 18 years of age, and you invest 1,000 on a savings account that returns 8% a year. By the time your 27 you will have $2,000, at 36 you will have 4,000 and by age 63 you will have $32,000. That is from a $1,000 investment that you never added any money to it. If you start with $3,000 that number goes to $128,000!! And if you add some along the way, you double, triple or quadruple that amount. Not too shabby!!
You can play with a simple equation and start figuring out how long it will take for your money to make more money.
Truly, our hope is that simple principles like this rule of 72 inspire you to both teach your kids more about finances, and to actually model good financial behavior for them as they get older.
Do you know any simple financial principle that you want your kids to learn from an early age? Let us know, we will love to hear from you!! drop us a note or two.
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