A Letter to Parents about the Power of Compounding,
by Katherine Bateman
Part I - Saving
Did you know that if you helped your child save $1,000 each year between the ages of 7 and 21 (15 years, $15,000 investment) and placed the money in an account that has an average interest rate of 4.5%, your child would have nearly $144,000 when she is 65? If your child doesn’t start saving until age 22, she will have to save $1,000 a year every year until age 65 (43 years, $43,000 investment) and still have only $131,000. That’s the power of compounding!
That goal is not a far-fetched dream for your children. Often savings plans start with birthday and holiday gifts from grandparents. When my oldest grandchild turned 10 – or “double digits” as she called it – I decided that I would give her $2,000 and use that money to teach her about savings and the power of compounding. Although money gifts had been saved for me when I was young, no one had shown me how my money grew on its own in my savings account. I wanted my granddaughter to understand that if she saved money in a bank and just left it there, the bank would pay her to save with them. It turns out that when children experience the excitement of saving money and watching their money grow through a regular savings plan enhanced by the power of compounding, they are hooked.
When kids are hooked on saving, they want to have more money to save. I sometimes speak to kids in elementary schools and usually ask how many in the class get allowances. I’m sure there are some parents who do not like my sending their child home to negotiate an allowance or payment for small jobs around the house. Yet, when a child earns money, the stage is set to teach all sorts of things about making smart money decisions. For example, when you work for your money, how much do you keep for yourself for a special treat and how much do you place in savings? How do you decide what to set aside for short-term savings for a bike or skateboard and how much do you put in long-term savings to grow on its own through compounding. How much of your savings could you spare for an investment that might make more money, but that also might be lost. Each of these decisions teaches your children the value of money and prepares them for the choices they will have to make regarding saving or spending when they get their first job.
Part II - Investing is featured on our Parents/Investing/Articles page.
About Katherine Bateman
Katherine Bateman is the author of The Young Investor: Projects and Activities for Making Your Money Grow, Second Edition. She has been both an educator and a municipal bond analyst. After receiving her PhD at the University of Michigan in Ann Arbor, she taught on the college level for over a decade. She then switched careers to become a higher education specialist in the municipal bond market. During that period she worked with the Securities and Exchange Commission to develop industry guidelines for the municipal market and served as the Financial Advisor to the Illinois Educational Facilities Authority. For information on other books and projects check out her web site at www.kentuckyclay.com.
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