This is a guest post from Grant Baldwin, the author of Reality Check, a book about helping students transition into the real world. His new website, BrokePiggy.com, answers questions from teenagers about personal finance, savings, and all things money.
This series “12 Things Every Teenager Needs To Know About Money (And How To Teach Them)” is a community blog experience.Â This post is only one of the 12 points in the series so to view the other 11, please visit the list of links below.
Two Words: Compound Interest
We all remember those days of sitting in a math class listening to a teacher talk about theorems, abstract algebra, or differential equations.Â And the entire time this lecture was going on, we all asked ourselves the same question:
When am I ever going to need this?
Don’t deny it.Â You had the same thought I did.Â And a lot of class periods that question popped into our minds except for the day we talked about (wait for it)…
Ok, maybe you still didn’t grasp compound interest then, but hopefully you’ve seen the light by now and wished you did grasp it better back then!Â When it comes to personal finance, that one simple math concept can be your best friend or your worst enemy.Â Here’s one way of looking at it…
Which one of these options would be worth more?
- Ten thousand dollars per day for 30 days.
- One penny that doubles every day for 30 days.
Option #1 would be the better choice for the majority of the time until you look at how the race finishes up.Â By the end of 30 days, option #1 would be worth $300,000.Â Not bad at all.Â But by the end of 30 days, option #2 would be worth (drum roll please)…
Pretty wild huh?Â So how do you teach this to a student?Â Here are some tips…
- Show Them The Numbers — Although most teenagers aren’t “number nerds,” they can still see that $5,368,709.12 is a better option than $300,000.Â When students look at the possibilities and you teach them they have an advantage, even over you as the parent, it begins to click for most teenagers.Â Time is on their side.
- Help Set Up A Roth IRA — The best investment option for taking advantage of compound interest at a young age is by setting up a Roth IRA.Â The only eligibility requirement is that your teen has an earned income.
- The Tortoise Always Wins The Race — Adults aren’t the only ones looking to get rich quick.Â Teenagers fall into that category as well.Â Part of your role as a parent is to teach them how slow and steady wins the race.Â Teach students to not count on striking it rich in the lottery, winning big on Deal or No Deal, or opening their front door to the prize patrol.Â The rabbit may seem faster but the consistency of the tortoise wins the race.
Curious about the other 11 things every teenager needs to know about money? Check them out at the following sites:
- Money Doesn’t Grow On Trees @ Bargaineering.com
- Two Words: Compound Interest @ PoorerThanYou.com
- Delay Gratification To Succeed @ GatherLittleByLittle.com
- Living On A Budget Isn’t An Option @ TotalCandor.com
- Credit Cards Will Steal Your Lunch Money @ PTMoney.com
- A Degree Is An Expensive Piece of Paper @ TheDigeratiLife.com
- Spend Money Based On Needs Not Wants @ MoneyNing.com
- There Is More Free Money Than You Realize For College @ FreeFromBroke.com
- Living On Your Own Isn’t Cheap @ Studenomics.com
- Taxes Are A Necessary Evil In Life @ MoneySmartLife.com
- Do What You Love, Love What You Do @ GenXFinance.com
- Don’t Be A Tightwad: Give Generously @ CashMoneyLife.com