With social media making spending money seem ‘cool’, money being so easy to borrow and technology making it so easy to spend money, we are losing the fight to reduce the number of young adults and the next generation going in to debt.
Money is already the number one cause of stress in young adults.
Teaching your kids to save provides them with the confidence and knowledge to beat this trend and become Financial Superheroes!
In this blog I set out how to teach your kids about saving money to make money. I will provide ways to explain the benefits of saving, games you can play and how you can help reinforce the message about saving money to make money using pocket money.
I note that this type of savings is only one of the three types of savings:
Saving money to make money, i.e. putting money away which earns a return and increases your wealth
Saving to spend later, i.e. seeing something you want and saving up the money to buy it in the future (read)
Saving by spending less, i.e. finding discounts or a cheaper version of the things you want (read)
Saving money to make money (recap for parents)
When you save money in a savings account or an investment account that money can grow due to the interest or return it makes. For example, if you have £100 and get a 10% return you will have £110 after a year, i.e. your money grows by £10.
If you then invest that £110 and get another 10% you will get £121, i.e. you made £11. So the amount of money you made increased from £10 in the first year to £11 in the second year. This extra £1 is from the money you earned in the first year (£10) growing a return at 10%.
The concept of your interest earning an interest is called is Compound Interest.
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” Albert Einstein.
Quiz question for you:
Assume you saved £5,000 for your kids before they are 2 years old then invested that money until they were 21. How much would that money be expected to grow the following year (from age 21 to 22) assuming an investment return of 7% pa?
A. £350
B. £869
C. £1,265
(scroll down for answer)
Answer C - By the time they are 21 that money is expected to be worth £18,082. 7% of £18,082 is £1,265 from age 21 to 22.
That’s over £100 per month that money could be making, FOREVER, without having to do any work.
Compound Interest can be life changing
My wife and I have been saving and investing since we first got together in 2005. With these savings we are making money even when we are not working. This gives us the opportunity to spend more time with our young kids (“they only grow up once!”) without the pressure of having to go to work to pay all our expenses. Our savings and compound interest do most of the work for us.
To get to this point we haven’t lived a very frugal life. We have been on regular holidays and buy nice things when we really like something. We just made saving and investing our priority. We have been careful not to buy stuff to impress other people and to not spend money on things which we do not think are good value. No matter how much we earn, we’re not going to spend £5 on a smoothie!
A lot of the richest people in the world now earn most of their money from compound interest rather than from their salaries.
I’m hoping the above has helped you understand the concept and power of compound interest. Now it’s time to help your kids learn it!
Teaching your kids the concept of Compound Interest
With my girls (age 5 and 7) I always use trees to help explain Compound Interest.
If they save some money it’s like planting a seed. Over time that seed will grow into a tree. That tree will then produce more seeds which can then be planted and grow into more trees. Those new trees produce more seeds and before long they’ll have a forest.
Most young adults today don’t have a single tree, let alone a forest.
We also teach them that if they spend that money, then a tree will be gone and it can’t produce anymore seeds.
Our girls know that Mummy and Daddy have been growing a forest for many years and are now able to live off the fruits and seeds it produces and therefore get to spend much more time with them.
In the ebook, ‘How to train your kids to become Financial Superheroes’ (which is free when you subscribe to www.bluetreeblog.com), it sets out one of the Superpowers they need to learn which is Clairvoyance.
Clairvoyance is the ability to see into the future.As compound interest takes time and the benefits in the short term can be small, we need to help our kids to have this Superpower. This not only helps them learn about how to save money to make money but in the future it will help them learn about the impact of inflation (the increase in the cost of goods) and why debt is so costly.
So how do you get your kids to appreciate that even if something starts small, it can grow materially over time?
Here are two games for you to do with your kids:
1. Rice on a chess board:First get a chess board and a lot of rice.Get them to put one grain of rice on the first square. Then put 2 grains of rice on the next square. Get them to keep doubling the number of grains of rice on the subsequent squares. They will soon see what happens when you start small and then grow.Before they start putting the rice on the board, get them to put the amount of rice they think they’ll need to complete the challenge into a separate bowl. They can then see how many squares they get to before they run out of rice.
2. The pocket money trick:Offer your kids the hypotheothical option of having £5 per week in pocket money or having 1p this week and then 2p the week after, then doubling in future weeks.Most kids will pick the £5 per week option as they compare £5 to 1p in the short-term.They should pick the second option! It will only take 10 weeks before they get over £5 per week and within 18 weeks they would have been getting over £1,000 per week!
Creating a habit of ‘saving money to make money’
The above has hopefully helped your kids appreciate the power of compound interest. That’s great but we need to make sure this isn’t a one off lesson. Unfortunately we forget a lot of what we learn pretty soon after we have learnt it. Therefore we need to find ways to bring these concepts into our every day life.
As mentioned in one of my previous blogs, Pocket Money is the most underrated financial education tool there is. We can use pocket money to really help our kids learn and create life changing habits, including how to save money to make money.
To help your kids learn this lesson using pocket money you need to:
Give your kids some pocket money each week (it doesn’t matter if it is a small amount)
Encourage them to save some of this money in a money box (doesn’t have to be a fancy money box - our girls made theirs - see photo below)
Before the next week’s round of pocket money, put a little extra into the money box (don’t let them see you do this)
Get them to count out how much they have now and let them see that their money has grown whilst it has been in their box.
This gives them an opportunity to see compound interest at work even if they are very young. Our kids are 5 and 7 and they are starting to really appreciate the concept.
Once your kids have enough money in their boxes, you can put the money into a savings or investment account to help it grow. Try to find ways to make it visual so they can see their money growing over time. This can be a wall chart or using an app like the RoosterMoney App. We invest our girls money and each month they enter how much pocket money they saved into the Blue Tree Digital Piggy Bank. This tool lets them see their money as Blue Trees and they get to see their Blue Tree forest grow over time and how many seeds they have planted.
The approach of using pocket money to help them save also gives you the opportunity to talk to your kids about money. Having these conversations will help reduce the ‘taboo’ status of money which means in the long-term your kids will feel more comfortable to ask for help if they ever need it, something which many people today are afraid to do.
Last word
There you have it. Hopefully your kids will learn the power of Compound Interest. Going back to Albert Einstein’s quote, it should mean your kids will be the ones that ‘earn it’ rather than what most people do which is ‘pay it’.
I hope you found this blog useful. I’ll be writing blogs on ‘saving to spend later’ and ‘saving by spending less’ so make sure you have subscribed so you don’t miss them.
If you want to build confidence to grow your kid’s savings by investing, then make sure you read the following blogs:
Or, if you want a good book to learn about investing, I'd recommend Tony Robbins 'Unshakeable'.
Action: Use pocket money to help your kids start ‘saving money to make money’!
If you found this blog useful then please remember to share to help other parents.
Thanks for reading!
Will
Related blogs you'll enjoy:
Games and books to help teach your kids about money click here