So, where do we even start? The idea of teaching financial literacy can seem overwhelming. Just the words, financial literacy, can bring up images of complicated math, charts, and boring lectures.
Well, that’s the good news. Financial literacy doesn’t have to be difficult to teach. In fact, the most important lessons don’t require math at all. Below are two lessons that will have a massive impact on the future wealth and happiness of your children. They are so simple that even a five year-old can learn them.
Lesson 1: Compound Growth
The goal of the first lesson is to teach compound growth and the habit of investing early.
To start, you want to illustrate how powerful compound growth really is. Hint: It’s really, really, really powerful (yes, that’s three reallys).
An easy way to do this, especially with young kids, is through the story of the King and the chessboard.
The story goes that when chess was first invented and presented to the King, the King offered the inventor anything that he wanted in payment. The inventor simply asked for a single grain of rice on the first square of a chessboard and double the amount of rice for every successive square. Two grains of rice on the second square. Four grains of rice on the third square. And so on.
The King was surprised to be asked for such a small reward and immediately asked his Treasurer to pay the inventor.
A week later, the inventor approached the King and asked why he still hadn’t been paid. Outraged, the King called in his Treasurer and demanded to know why the inventor hadn’t been paid. Trembling and scared, the Treasurer explained that by the time he reached halfway through the chessboard, there wasn’t enough rice in the entire kingdom to pay the inventor.
That’s the power of compound growth!
This is a really fun story to illustrate with your kids using a chessboard and slowly adding grains of rice to each square. Let your kids count out and place the grains of rice while you’re telling the story. Just like the Treasurer, let them discover themselves how fast exponential growth grows and they run out of rice to continue. On the twentieth square, you would have to place one million grains of rice. On the sixty-fourth square, you would have to place eighteen quintillion grains of rice. That’s 18,000,000,000,000,000,000!
This simple story shows how compound growth grows slowly at first but continues to grow faster and faster.
Once you have illustrated the power of compound growth, you can easily introduce the habit of saving to your children. Teach them to save 20 percent of everything they receive and tell them that you’ll invest it for them. At a 10 percent return, the average historical return of the stock market, their money will double almost every seven years. Referring to the above example, imagine how much their money could grow as it continues to double over their lifetime.
This single habit can have the largest financial impact on our children’s lives. And the sooner we teach our kids this lesson, the larger the impact.
Lesson 2: The Value of Money
The goal of the second lesson is to teach the value of money.
Talking about money is still taboo and one of the few things that we don’t talk about. We will tell our best friends almost everything about ourselves except, how much we earn or spend. But how can our kids learn the value of money if they don’t know how much things cost?
So, to start teaching this lesson can’t be easier. Simply tell your kids about how much things cost. Let them know how much you paid for dinner or how much their clothes cost. As they get older, you can tell them how much you earn and how much you spent on your house and car.
And a great trick when your kids are really young and don’t understand money at all is to use chocolate bars to describe value. For example, you can tell them that the teddy bear they want is fifteen chocolate bars.
By learning the value of things, our children can begin to make informed decisions on where they want to spend their money. They can choose what’s most valuable to them and what they are willing to give up. We often get caught up in spending without considering the cost. We forget that when we spend, we are always giving up something.
Knowing the value of money is the first step in breaking the cycle of mindless consumerism and becoming aware of what’s really important to us.
Teaching our kids financial literacy doesn’t have to be hard. By following these two simple lessons, we can eliminate money as the number one cause of stress for our kids. And even more importantly, teaching our kids financial literacy is the only way that we can begin to change the way we think about money and what it means to live a rich life.