Forget giving kids an allowance. Pay them interest instead.
Here's how it works
This is a system you can use to teach the power of compounding and business acumen to your kids.
Step #1. Lay the groundwork
At around the age of 2 or 3, explain to each of your children the concept of saving money. However, telling them about saving is not the main goal.
Making sure they know that money works for you while you sleep is the most important part. Show them that they can let others use their money. In return, they pay for borrowing it and you earn for lending it.
To make it simple, ask them to give you the money, and that you'll loan it out for them. They will receive 12% a year. Or 1% a month.
This is their modern piggybank, and you're their modern bank.
They'll call it a "Loan Account".
Step #2. Seed the "Loan Account"
So where do they get money from for the loan account?
We don't give them an allowance. So they normally start with very little that they have in their fun piggy bank.
Typically they get money from birthday gifts, holiday gifts, and then odd jobs as they get older.
Step #3. Make it visual
Naturally it's easier for them to understand if they can visualize it.
So set up a simple Google Sheet to track the money and the interest.
It will show:
- How much money they put in
- How much interest they earn per day
- How much interest they earned so far
- How much they have in total now
To them it's like a bank account. But it keeps growing at a daily compounded rate.
As they get older and know how to access Google Sheets, it's shared with them so they can check it any time on their own.
Here are the results
The outcome is amazing. The following are some of the results you might notice as they get older:
- Result 1 - They're infatuated by how much they're earning per day, even if it's $0.45 per day, that's a lot of money for a kid. It also gamifies it for them to add more money so that the daily earnings go up. There is instant gratification of sorts to see that on the sheet.
- Result 2 - When their grandparents ask them what they want for their birthday, the typical response is "money". That's because they'd rather invest it into the Loan Account and generate more money. They have naturally built up that "invest it" mentality.
- Result 3 - Over the years it would become natural to think of money as an income generating tool. Rather than a tool that's there to buy something as soon as you get it. The incentive was flipped to invest instead of spend. They might spend it at times, but way more cautiously because there is a solid understanding of the impact it will have on their daily income. Going from earning $0.45 down to $0.40 per day is no fun.
- Result 4 - They noticed that their daily earnings went up, even if they didn't add any money into the Loan Account. They naturally learned the magic of compounding.
- Result 5 - They focus on the long term impact of money, rather than a short term gratification it may bring.
This is an experiment that creates lessons many years in the making. I hope you find it helpful.