Lucky for me, my wife is a 5th grade teacher. Why? Well, for starters, she has a natural knack for handling the intricacies of child behavior and thought. This should come in handy when we have children of our own! She understands children…knows what makes them tick. She takes great pleasure in getting them excited to learn and inspired to explore topics that will undoubtedly shape their views on the world around them. Although I have little personal experience (besides remembering my own childhood), I understand that a child’s mind is incredibly malleable and stretchable. To this end, a teacher must painstakingly craft curriculum and lesson plans to best capture the hearts and minds of a budding class. That’s a huge job, and quite honestly, my wife has a ton of responsibility. I’m so grateful that she is in the position to guide pre-adolescent thought.
As part of her mathematics curriculum, my wife has created a program called Math Masters, in which members of the community are invited to come to the classroom and discuss how math is utilized in their daily career. After all, we’re trying to teach these kids that math is actually extremely practical, right? Lucky for me, each year I’m one of these Math “Masters”.
My topic (of course) is investing and compound interest. Yeah, I know, compound interest seems like a heavy concept for a 10 year old to wrap his noggin around. But hey, I’m not busting out exponential growth formulas like I did on my in-depth blog post on the topic. Anyway, before I get all philosophical on the topic of money and children, here’s a quick run down of what I discuss with the kids:
First, I provide the kids some fun anecdotal stories about Warren Buffett, discussing his love of math, investing, and general thriftiness. For example, at age six, Warren Buffett would buy six packs of Coca-Cola from his grandfather’s grocery store for a quarter, and sell each Coke bottle for a nickel. How much profit did he make on each six pack sold? Yep, five cents. I also discuss how he worked hard as a paper boy, saving thousands of dollars by the time he graduated highschool. Some of that money would help him start his first investment partnership when he began his career later on in life. The kids need to know that hard work and thriftiness definitely do pay off. Also, the students find it interesting that Warren bought his first stock at the ripe age of 11 (right around their age), and from that I go on to explain what a stock actually is. “Who here wants to be a business owner?” Everyone raises their hands excitedly. In any case, these discussions and fun stories warm the students up for the main event: the demonstration of compound interest.
I begin explaining the concept with a “snowman” approach. “How do you make a snowman?,” I ask. Together we walk through it. You take a snowball, and begin rolling. “What happens to the snowball the longer you roll it?” It gets bigger the longer you roll it, of course. Not only that, but the speed at which it grows gets faster and faster, the longer you are rolling. That growth is the exact same with investing. The more time you have to invest, the more growth is experienced. You might say that time and compound interest are joined at the hip. Sure, it ain’t perfect, but the concept seems to get through to them.
Next, we demonstrate compound interest with M&Ms. Each child is allotted one M&M to start and then told to think of that M&M as having real monetary value, like the value of a stock. Every 7 years, the amount of M&M’s each child has doubles (we’re handing them out to the kids). We know this as the Rule of Seven, implying that with a return of 10% (roughly the modern day long term stock market average return), an investment will double every seven years. I leave some of these details out for the kids, so as not to over complicate matters. Assuming seven years have gone by, each child has two M&Ms and after 14 years each has four (obviously, we are speeding up time together so as to fit the course into a half hour time slot!).
As the kids fight the temptation to just throw the candy in their mouths, I instruct them that they now have a choice to make. They can either keep investing the M&Ms, or sell three of them in order to buy an XBox One gaming system (not a real one, of course, but they do get a fancy paper cutout of one). By this point, most kids are quick to refuse, correctly predicting the true cost of the purchase on their future wealth. Those that decide to “buy” the gaming system system are down to one M&M, the rest of the students having four.
Seven more years go by, and the kids that purchased the gaming system are back to having 2 candies vs. 8 for the M&M savers. Another 7 years goes by, and the savers/investors have 16 vs. 4 for the Xbox buyers. I then show them a chart of 70 years worth of M&M savings, and how much “wealthier” the students that chose to refuse the Xbox purchase have become by the time they reach their golden years of age; eight times wealthier to be exact!
Taken one step further, I tell them, imagine that instead of one M&M, you actually invested $1,000 in a stock that also doubled every 7 years. What would be the difference in money after those same 70 years? At this point, the kids understand that in order to multiply by 1,000, you put three zeros after each number. Their faces light up when they realize that they’d have over one million dollars after 70 years, simply by being patient and having persistence.
Ok, ok, like I said, now’s my chance to get a little philosophical on you. My 5th grade math lesson is just one example of an infinite number of ways to get through to children about the fruits of saving, investing, and most of all, having patience. The younger they learn the art of saving and investing, the sooner they’ll grasp the reality of compound interest. And as we all know by now, time really does wonders for the prudent investor, no matter how much money he or she begins to invest with. So start ‘em young!
If we don’t provide our kids with these tools of knowledge, we may very well be stripping them of their inherent right to lead a more financially-independent life later on. Teaching our children the value of dollar through hard work, thrift, and investment, provides a wonderful multiplier effect as generations come and go – each generation better than the last.
Finally, teach them that with wealth comes a responsibility to give back to our great American society, whose capitalistic foundation afforded them the right and ability to build their wealth in the first place.
So tell me, how do you teach your kids about money?