Sean Mulcahy
July 15, 2020
If you’re a parent, a grandparent, a teacher, aunt, uncle-anyone of the adult variety I strongly encourage to show your child a compound interest calculator and what the future could look like if they understand one.
Why?
Because Albert Einstein said, "Compound interest is the eighth wonder of the world.” NO.
Because Warren Buffet, one of the wealthiest men in the world said “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” NO.
The main reason you should show your child a compound interest calculator is time. Time is the friend of your child. Actually, time is the best friend of your child.
I think whenever you start giving your child an allowance is when they should see a compound interest calculator. If you give them an allowance at 6, 7, or 8, then great, show them the calculator then. Do it no later than the age of 10.
Here is my reasoning. Say your child at age 7 gets an allowance of $5 a week. For their birthday they receive another $100 in cash from various family members, for a combined total of $360 for the year.
Now let's watch what can happen. If $360 is added each year and invested in an index fund earning 7%, at age 21 your child would have $9,614.72 with compound interest. I can hear all the parents saying, "Wait, my kid should be able to spend their birthday money." I agree. They should. But, I also think their allowance will increase over time along with odd jobs and various life celebrations. So over that fourteen-year time period, investing $360 a year is probably very conservative. Plus, you really want to teach them the power of time.
Ok. Still not impressed. Consider the story of Theodore Johnson who worked for UPS and never made more than $14,000 a year and yet with compound interest was worth more than $70 million over 5 decades. Time. Your child's best friend.
You can run your own money scenarios by using a compound interest calculator.
Below is the calculator I use but there are plenty of compound interest calculators on the internet. http://www.moneychimp.com/calculator/compound_interest_calculator.htm
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