Investing For Your Future
Monthly IFYF Investment Message
November 2006
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One important skill that is often overlooked in investment courses is teaching children to appreciate the awesome power of compound interest. As shown in the How Time Affects the Value of Money table of Unit 2 of the Cooperative Extension Investing For Your Future home study course (www.investing.rutgers.edu), several decades of compound interest can result in a significant sum accumulated in time for retirement. The "trick" to catching the attention of children is to make compound interest and saving and investing, in general, sound exciting and fun.
One way to engage children is through the question "How many times does a dollar have to double to reach $1 million dollars?" Most people will reply with a large number such as 200 or even 1,000. The correct answer is actually 20 as shown below:
Doubling Period #1 $2
Doubling Period #2 $4
Doubling Period #3 $8
Doubling Period #4 $16
Doubling Period #5 $32
Doubling Period #6 $64
Doubling Period #7 $128
Doubling Period #8 $256
Doubling Period #9 $512
Doubling Period #10 $1,024
Doubling Period #11 $2,048
Doubling Period #12 $4,096
Doubling Period #13 $8,192
Doubling Period #14 $16,384
Doubling Period #15 $32,768
Doubling Period #16 $65,526
Doubling Period #17 $131,072
Doubling Period #18 $262,144
Doubling Period #19 $524,288
Doubling Period #20 $1,048,576
Of course, in the real world, nobody gets a 100% return compounded daily, but the example makes a point. Compound interest grows money slowly at first but much faster during the last few rounds of doubling. It takes 19 rounds of doubling for a dollar to reach $500,000 but only one more doubling period to double again from roughly $500,000 to $1 million.
The moral of the story is to start investing as early in life as possible. To encourage thrifty habits in their children, parents may decide to match money set aside by their children for long-term goals such as travel, "big ticket" items, or college expenses, much like a matched 401(k). As Ben Franklin noted more than 200 years ago, "A penny saved is a penny earned." His face is on $100 bills for a reason!
Simple messages that promote saving and investing are also effective with kids. A California company called It's A Habit, Inc. (www.itsahabit.com) produces books and CDs that encourage children to save with catchy slogans such as "from every dollar save a dime" and "save one out of ten again and again." Another company called Moonjar (www.moonjar.com) produces kid-friendly cardboard savings banks with compartments for long- and short-term savings and charitable gifting.
Compound interest has been described as the 8th wonder of the world. Children have decades to take advantage of its magic if they are taught at an early age to appreciate its' awesome power to grow money over time. Many adults say they wish they were taught more about saving and investing. Today, however, there are more resources than ever to teach children financial skills. Some helpful Web sites for parents are www.jumpstart.org, www.nefe.org, and www.kidsmoney.org