Teaching Personal Finance For Kids

One of the easiest rules of thumb in "teaching personal finance for kids" is to give them a quick lesson in the "value of money" and compound interest using the "Rule of 72". The "Rule of 72" is a basic and simple way of explaining compound interest to your children using simple arithmetic and money (they all want to learn how to get more money!). For convenience in teaching this rule of thumb to children is that 72 is a convenient choice of numerator, since it has many divisors that are easy to remember: 1, 2, 3, 4, 6, 8, 9, and 12. Although present day digital scientific calculators and spreadsheet programs provide methods to find the accurate doubling time, the rule is useful for illustrating the rule using quick mental calculations or when only a basic calculator is available.

In finance, the Rule of 72 is a method of determining the doubling time a one time investment. For impact, it can also be used to illustrate how fast debt can grow. Simply stated, if you divide the annual rate of return into 72, that will tell you approximately how long it takes to double your money.

For example …

Take a savings account that receives 3% interest. 72 divided by 3 = 24 … It would take approximately 24 years to double that deposit. Over a 48 year span, the money would double twice (that hardly keeps up with inflation!)

Another investment scenario may achieve 9%. That would mean the doubling period would take 8 years and it would double 6 times in that same 48 years … a significant difference!

Now how do you actually illustrate this with children?

My favorite way is to raid the penny jar. (You will need at least 100 pennies).

Start off by giving a child 10 pennies and you keep 10 pennies telling the child that they are getting 9% on their savings and that you are only getting 3%.

Count to 8 (each number representing 1 year) and double the amount of pennies for the child. The child will notice that you have not earned twice the amount of pennies yet.

Continue counting and double them again at 16 and again at 24. At this point, double your own stack of pennies once. You will have 20 pennies and they will have 80 pennies. They will get the point when you reinforce that you accepted a lower rate of return. Make a game of it trying different rates of return … make sure that you have enough pennies!

Teaching finance to kids in a fun way that they understand today will help them make wiser and more knowledgeable decisions for themselves in the future.

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