Driving Interest on Interest with the Next Generation
Maybe your middle schooler is already hip to saving. Many kids this age do chores and earn allowances, perhaps putting part of what they earn into a savings account for college or another future expense.
You know what’s better than saving money? Earning more money for free. That’s the power of interest, and that can get your middle schooler interested in learning about it.
Interest rates are making plenty of headlines these days amid the current economic environment. Use its prevalence in current events as a way to start the conversation and teach your kids how interest rates work with some engaging activities.
How to teach kids about interest rates
There are a couple of home activities you can do with kids to teach them about interest rates.
Say you give your child a weekly allowance. Tell them that for every $1 they put into savings out of the allowance, you’ll add $0.25. At the end of each month, go over with your child how much they put into savings and how much they earned in interest. You can track this activity over a year so they can see how substantial their earnings have been.
Another way to teach your middle schooler about interest is to borrow money from them and pay it back with interest. When you pay it back, talk to your child about why you are paying them back more than what you borrowed: that it costs money to borrow money! You can talk about how you pay interest on things like a house and a car because you had to borrow money from the bank in order to buy these bigger items. You can then use that as opportunity to talk about how being responsible with your money by paying others back quickly and not borrowing more than you really need will help you pay less for these big items in the future.
When they (and you!) are ready, you can flip the experiment around. When they ask for a big-ticket item you can lend them the money, with interest, of course. Help them set up a repayment plan, with an option to work off their debt sooner so they can have the opportunity to work harder, pay it back sooner and pay less overall for their item. Don’t be afraid to get creative, and make sure to stick to your terms.
When you do these types of engaging activities, you teach your kids the impact of varying rates, and you can also highlight how both low and higher interest rates can affect them as an investor and borrower.
An opportunity for learning
Look for opportunities to practice financial literacy with fun activities. Try our Cash Stash Dash calculator for an interactive look at how being conscious of your everyday expenses can translate to savings and more. Continue to have conversations around interest rates to help your child grow their savings and make better choices for their financial future.
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2020-102442 Exp 5/2022