Like a lot of parents, I’m doing my best to teach my kids about money. My wish is for them to know what I didn’t know about money and avoid the silly mistakes I made. I want compound interest to work for them and give them financial freedom at an early age.
The Story
Here’s the story. Last week, I was talking with my two kids about their commission and how much they earn for each job. Both kids were very interested in how much they’d be paid.
Then came the dreaded part:
“How much do we need to give to you?”
“You mean invest” I quickly interjected.
“Yeah, but we don’t get to use it now,” one of the girls said.
“True” I replied, but added how much better it was to set some money aside and let it grow. I went on trying to explain compound interest in a way a child could understand, probably a futile attempt by the glazed look on their faces.
“Well, when do we get to use the money? my older daughter asked.
“Good question, sometime when you’re older and when it makes sense. It can be used for a lot of things.”
They both chimed in at this point. “So like when we’re way older?”
“I don’t know a set age but it will make sense when the time is right.”
The Toy Store
That’s when my youngest said something that was wise beyond her years.
“I’m going to use my money for the toy store. I want to get all the money I earned now because I’m not going to want to go to the toy store when I’m older.”
Was this kid reading Die With Zero or something I thought to myself.
If you haven’t read the book, the premise is to do things while you can. While you’re healthy, able, and that particular thing interests you.
For example, if someone wants to become an elite mountain climber, the time to go for it is in your twenties and thirties. Not save up for the best equipment and to try it when you’re 70.
Anyways, back to the toy store. My seven-year old was exactly right, she’s not going to want to go to the toy store when she’s older. Eventually it won’t be fun or interesting to her.
The time of her being excited to go to the toy store is going to be short-lived.
Because of that, it is really important for her to use some of the money she saved up and go while she can. I was proud of her for recognizing that. While at the same time, I want her to understand the value of investing and compound interest.
How To Have Your Cake and Eat It Too
I don’t think investing and enjoying life in the present are mutually exclusive. I believe you can do both.
The trick with both of my daughters, especially the youngest one, is to teach this concept in a way that shows you can enjoy life now while investing at the same time. Huge sacrifices and deprivation don’t need to be part of the equation.
Lessons about compound interest, saving, and investing all have to come from the understanding that a child’s life is about the now. As adults, most of us can grasp delayed gratification. Kids don’t have that same understanding.
A child understands the now and needs bigger concepts like compound interest explained over time at their level. Most of the lessons will need to be repeated, revised, and re-explained again and again.
For as many failures I’m going to face as a parent, if I can get across the message that you can live for the now and invest for the future, I’ll consider that a win.
What are you teaching your kids about money?
