I will be writing some posts to try to educate my kids. I know they are still very young (5 and 7) but it is never too early to start. And they can read these blog posts later on in life 😉 (This is probably the case, because they don’t speak or read English very well at this moment – You got to love an understatement!).
This is another blog post to keep the “snowball of knowledge” rolling.
I think when you educate kids about money, they will benefit from it for the rest of their lives. Or as the saying goes: “What is learned in the cradle is carried to the tomb”. And to educate your kid is your responsibility as a parent.
This post is about a quick an easy way to calculate how much time it takes to double your money.
Last week I go an email from my bank, with the notice that the interest rates on my saving accounts will be adjusted. My oldest kid heard me grumbling about it. And she asked me about it. So I told her that our bank holds our savings in a secure place. But instead of leaving our money in a big vault, the bank is using our money, (e.g. by helping people to buy a home by providing them a mortgage), at times when we don’t need it. And the bank pays us for this. And this is called an interest rate.
She understood this and them asked the question of how much we get paid. So I told her that our bank is paying us 0.5% interest. That for every 100 euro we get 0.50 euro cents. She looked at me in disbelief and yelled, that’s a small bit, and can we find another bank that pays more. Yes!! That made me proud! She has what we call in The Netherlands: a V.O.C.-mentality (V.O.C. is the Vereenigde Oostindische Companie (Dutch East India Company)).
I had to disappoint her, because at this moment there are no banks with high interest rate. After a brief moment of silence I found it a perfect moment to learn her about The Rule of 72.
The Rule of 72 is a simple and easy way to calculate the approximate time it takes for your money to double. I already told her about compound interest and the magic of it. I saw in her eyes that she forgot this already. So no problem, my kids are still young, I have plenty of time to repeat this important lesson.
But how do you explain The Rule of 72 to a 7-year old?
With The Rule of 72 you can calculate how many years it takes to double your money with the interest rate the bank gives you. All you have to do is divide 72 by the interest rate of your bank (or your annual rate of return of an investment) and you get the approximate number of years that it takes to double your money.
Okay that I understand, she said, so my money in my saving account will double in 72 / 0.5 years. Dad can you please help me; we do not have fractions in class yet. So I told her that if she does noting her money would double in approx. 144 years. That was a bit disappointed. We have to do something different dad, this will take way too much time.
I told her that one option is to start investing. But that’s for another episode of Teaching my kids 😉
This is my eleventh blog post about teaching my kids. I hope my kids at the age of say 18, have all the financial knowledge I’m having right now. This would be a huge advantage for them! And that’s why I started these blog post series.
Do you talk with your kids about investing? I like to hear from you.
And will you help me to get the “snowball of knowledge” rolling?