Whenever I tell clients that I have something that will help them to educate their children about money, most of them are eager to listen. By teaching children the fundamentals of money management, a parent can help them make sound financial decisions as adults.
The "Miracle of Compound Interest Game" is a simple, but effective exercise that teaches children, in a manner that is fun, that the longer they hold on to money, the faster it will grow.
I played this game with my two kids Ashley and Andrew, when they were 11 and 8 respectively, and the exercise had an equally positive impact on both. (They are now in their mid-twenties.)
How To Play The Game
The following materials are needed:
Sheet of paper
Jar or tin can
Money (e.g. 1- $20 bill; 25 - $1 bills; loose change)
Make a simple graph with the paper. Label the vertical axis "Dollars" and number it from $1 to $60; the horizontal axis label should be "Days" with numbers 1 to 10. Next, creatively label the jar or tin container as a Bank or Savings Institution incorporating the name of your children or family into the label so the exercise is entertaining and "fun." Now you are ready to begin the lesson.
First, explain to your children that you are going to give them twenty dollars. This money is theirs to keep under one condition: they must leave it in savings for 10 days. Now place the twenty-dollar bill in the "Bank." Carefully explain to them that the bank will add ten percent to their account balance ($20.00) each day. If you have more than one child, inform them that they can split the money in the bank at the end of the ten-day period equally among themselves.
When I conducted the exercise with my children, my oldest, Ashley, calculated the interest and Andrew filled in the graph showing the account value after each "simulated" complete day of deposit. Together they watched (and were amazed) as the money in the account grew from $20.00 to $22.00 to $24.20. By the end of the third day the children's account balance had grown to $26.62 in "hard-earned" savings. By this point, their interest in monetary affairs, particularly banking, was growing rapidly.
Realizing the Miracle
After playing for a few days, ask your children how much money they think will be in the jar after 10 days. Ashley and Andrew studied the graph and reasoned that the account balance would be about $40.00. After the exercise, they were surprised to see that the balance actually grew to more than $50.00! Explain to your children that the growth rate in this exercise is exaggerated and that in real life the account value would not actually increase this rapidly, but that the general trend is, indeed, similar.
I am grateful that I was able to teach my children a valuable lesson about compound interest by playing this game with them. The attitudes that our children develop regarding money while they are young will affect them for the rest of their lives.