One thing many parents struggle with is – how do you teach kids about money without boring them? How do you know what lessons are appropriate for what ages? From simple lessons like savings, to complex ones like investing – from checking accounts to 401ks – those of us who are parents interested in personal finance often give this subject quite a bit of thought. That’s why I decided to use a recent trip to the bank to help teach my ten year old about the power of compound interest.
One thing that I think it’s important we parents remember is that the best way to teach kids is by showing them what we do, and explaining why we do the things we do. So when I recently calculated my quarterly net worth (find out more about my process here!) and found I had two savings bonds that had reached 30 year maturity, I figured this was a perfect chance to show just what can happen if you save money and leave it alone for a long time.
Kid Trips to the Bank – A Dying Art?
I have vivid memories of accompanying my parents to the bank in the 80’s and 90’s, back in the days before internet banking became ubiquitous. Going to the bank was necessary but boring, and my parents never let me participate in what was going on. I would basically have to wait in the lobby until they were done with whatever it was they were doing.
Nowadays I think a lot of people don’t have an actual, physical bank. Why would you? You can deposit checks using your phone. Online savings accounts are ubiquitous and pay a higher interest rate than a brick and mortar bank. Physical banks are for those of us that are older. And at 37, I feel old nowadays.
So yes, I do still have a brick and mortar bank, and I like it. I don’t have much with them – just my checking account and a safe deposit box. The safe deposit box has the usual important documents in it (birth certificates and such) but also a few paper savings bonds from back when they used to sell those.
When I calculate my net worth, part of what I do is use the savings bond calculator to see what the current value of the bonds is. Scrolling through the list this quarter, I noticed two of the bonds didn’t have an interest rate next to them, which meant they had hit their 30 year maturity. Yes, my savings bonds were older than some of my readers (there’s my old showing again). They were purchased in 1986 and 1987 back when I was a little kid.
Since they had stopped earning interest, I knew I needed to go cash them in. The only reason I still keep the paper bonds is that they earn good interest-much better than the interest rate I can get at any bank. They range from around 2.7% all the way up to 5.8%. Theoretically I don’t need to keep the paper versions, I could put them into Treasury Direct instead. But I like keeping them around.
And the plus side of having an actual bank is that you can cash savings bonds in with teh teller right away. So I headed down last Saturday with my ten year old son to teach him a lesson in compound interest.
Teaching Kids About Money and Compound Interest – The Savings Bond Edition
As we arrived at the bank, I explained to him what savings bonds are. “You see, Nathan, back when I was a kid my grandparents would sometimes give me gifts of savings bonds. They were a piece of paper you could buy that would earn interest, and many years later the amount you paid would double. So if you bought it for $25, years later it would be worth $50. They would put the $50 on the bond so you’d know how much it would be worth one day”.
We went into the bank and I told the teller I needed to get into the safe deposit box. After we got the box, I had him go into the room with me while I looked for those two specific bonds. I found them pretty quickly because I don’t exactly have a lot of those old EE bonds, and showed him.
“See how these two bonds have $50 and $100 on them? My grandparents got them as presents for me when I was 6 and 7 years old. They bought the $50 bond for $25, and the $100 bond for $50. So in total they paid $75. The bonds earned interest over the years, and the government guaranteed that twice as much as great-grandma and great-grandpa paid.”
I didn’t go into details with him, because I wasn’t sure about the original doubling period for these particular bonds. They’re 30 years old and I know the terms had changed a lot over the years. I looked it up for you all, and I found that these particular bonds were a sweet deal. Savings bonds purchased before November 1986 earned 7.5% interest per year, and were guaranteed to double in 10 years. Bonds purchased after that but before 1993 earned 6% per year and doubled in 12 years. You can now see why I don’t just cash in my old bonds, those are some really great rates-especially nowadays. The bonds didn’t earn those same rates after they matured, but the rates they earned were still high.
I signed the backs of the bonds and gave them to Nathan, telling him that he was going to get to cash them in. As we waited in line, I explained that the bonds kept earning interest after they doubled, up until recently when they hit 30 years old. I asked how much he thought they might be worth now. “Remember,” I said, “Great-Grandma and Great Grandpa spent $75 on them, and when they doubled they were worth $150.”. He thought about it for a minute and guessed they might be worth $500.
We handed the bonds to the teller and a few minutes later she said the bonds were worth $311.04. Nathan was a bit disappointed that his guess was wrong. “You were close!” I said. He looked at me with that withering look ten year olds give their mothers and said “Mom. Come on. I was off by $200!”.
“Well it’s still pretty cool – Great Grandma and Great Grandpa spent $75, and now, 30 years later, I get $300! That’s a great gift, don’t you think?”
“Yeah, it’s pretty cool,” he said.
But Is It Cool?
Sounds like I must have earned a pretty amazing rate of return for the original investment to double and double again, right? Well, it was pretty good, but not fantastic. According to this calculator, over 30 years a rate of 4.855% will turn $75 into $311. Seeing as this was a guaranteed return from the government with no risk, I think that’s pretty awesome. But had that money been invested instead – say grandma and grandpa had bought me $75 in stocks at that time, in the S&P 500 – my rate of return would have been 9.456%. And I would have had over a thousand dollars.
Don’t believe it? Head on over to this compound interest calculator and check out different scenarios. It really makes you think, doesn’t it?
Perhaps you can be like my grandparents – make an investment today in the future of your kids, nieces and nephews, or children of your friends. Instead of spending $25 on a new plastic whatever, take that money and buy a share of stock in a toy company. Or put it in one of the robo-advisors with a low minimum. Or put it into their 529 plan for college, and let it grow for a decade. One day maybe they’ll be looking at your gift as an adult, grateful that you got them something that’s benefiting them decades down the line.
How have you taught your kids about compound interest? Give your fellow readers some ideas in the comments.
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P.S. Are you curious what I’m going to do with the $311? Well I don’t need it for anything specific, so I decided to put it into my middle sons 529 plan. He was very close to his great-grandma right up until the point where she passed away a few years ago. He misses her a lot, and I thought she would have liked to know that her birthday gift to me so many years ago was going to help her great-grandson go to college one day.