Hey Dad, I Earned a Penny in Interest!
It was a regular day. I was dressed for work and heading for the door. I passed by my son Nathan, who was working on the computer. Just as I was about to leave, he said, “Hey dad, I earned a penny in interest!” Music to my ears.
Not too long ago I had taken him to our bank and opened up a basic checking and savings account for him. We want our kids to learn about how to manage their own money. We’ve had many conversations about money around the dinner table, as well as when opportunities arise (which I tend to take full advantage of!). They understand the basics of saving, investing, what stocks are, and compound interest. But until recently, they had never EXPERIENCED it. In my opinion, there’s no better way to learn about something than by actually doing it.
In this day and age, I have my kids set up with our bank’s app on their phones and they each have a debit card. I’ve shown them how to transfer money from checking to savings online, and how to pay their tithes online. Each week I deposit money into their accounts for allowance. We have taught them to pay 10% in tithes and to save 10% (pay yourself first) and the rest is their’s to spend as they choose.
So, when I heard my son proudly declare that he had earned a penny in interest, I knew the light bulb had turned on.
I’m sure we can all agree that a penny is not a lot of money. Nothing to get too excited about. But what made me so thrilled was that for the first time my son realized that the money he had saved could actually make money. Even though I had taught him this principle many times, nothing I had ever said had the same effect as him experiencing it for himself with his own money.
Of course, loving personal finance the way I do, I seized the moment. I told him how awesome it was that he didn’t have to do anything and his money earned him more money in interest. We talked about the balance of risk and reward. Since his savings account was a really safe place to keep his money, it only paid a low interest rate of about 0.5% per year. However, if he invested it in something more volatile or risky, like stocks, then it could pay him 10% per year (I chose this number to make the math easy).
After he thought about this for a moment, he asked me if he had $600,000 invested in the stock market (not sure why he picked that large number) how much it would grow in 10 years? I pulled out my compound interest calculator and we did the math together. Without out any additions, at 10% annual interest rate, it would grow to $1,556,245. His mind was blown. I could really see the wheels start to turn and loved every second of it.
I’m sure everyone reading this likely understands the concept of your money making money by earning interest. But have you looked at your own accounts lately? If not, I suggest that you do.
Maybe you’ll have that light bulb moment like my son did as you rediscover the power of your money making money through compounding over time. On a long journey, sometimes it’s helpful to look back and see the ground you’ve already covered in order to give you the motivation to keep going.
For me, I find great satisfaction seeing the power of compound interest over time in our own investments, and that gives me the motivation to keep pushing forward towards financial independence.
Conclusion
I wrote about this little experience for a couple of reasons. First, it demonstrates that no matter how much we teach our kids about money, sometimes they have to experience something for themselves before they really understand it. Second, it can be really motivating to see your invested money actually earning more money for you, helping to secure your own financial independence.
Here are some take home points to consider:
- How are you teaching your kids about money? Are they old enough to have their own accounts and begin managing it themselves? Maybe now is the time to move forward on this if you haven’t already.
- Don’t have kids yet? When you do, how will you teach them about money? Consider talking to your significant other about this and brainstorm some ideas.
- Need a little motivational boost? Check your own investment accounts and see how much money your investments have earned. If it’s a good chunk of change, way to go, keep up the good work! If not, look at ways to invest more wisely or increase your savings rate.
Thanks for reading. I hope you are doing well in your progress towards reaching FI. If you have any questions or comments that might help other readers, please list them below. In the meantime, keeping working towards Freedom Through FI!
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