Being in a crisis makes us all realise some hard and basic truths of life. We understand the importance of money, of saving and of investing.
This is an important lesson that we should also teach our children from an early age. Saving and investing should be a habit – a habit which will help them tide over stressful and tough situations in life. If you have saved regularly, then at least that is one thing less to worry about in times of crisis.
One of the most important concepts in investing is that of compounding – how fast money tends to increase using compounding, which is nothing but receiving interest on not just the principal but also on the interest earned.
Let us see a very simple activity to teach the children this concept –
This activity must be done over a period of a few months for maximum benefit and understanding.
It will teach the child the concept of rent, the concept of interest and basic compounding.
How to play
You can decide to rent out any of your children’s item for a mutually decided monthly rent. For example, in one experiment, we rented out a water bottle that the child had received as a gift for the father’s office use.
You also need to decide the following beforehand:
- The object to be rented (water bottle)
- The amount of monthly rent (Rs 7 per month – this was mutually negotiated between the child and his father)
- The date by which it can be paid without any penalty (They decided that payment can be made between 1st and 3rd of every month)
- Interest or penalty to be charged thereafter (In this case they decided, interest would be Rs 1 per day, If total amount to be paid increases to Rs 10, the interest would be Rs 2 per day. If total amount to be paid is more than Rs 20, interest would increase to Rs 3 per day).
How it Unfolded
The 1st month, when it started, the child got Rs 7 and his father used the water bottle. Not being used to the payments, the next month itself, the father forgot the payment on time. He remembered on 10th of the next month. By then, the child had calculated the following in this format in his notebook:
|Day||Starting amount||Interest||Amount to be paid|
Therefore instead of Rs 7, he got Rs 18 that month. If it had been a simple interest or penalty of Rs 1 per day, the amount would have been Rs 14.
After that, for a few months, the father made the payments on time or within 1 or 2 days, until 1 month, when he forgot till the 19th. And guess what – the power of ‘compounding’ or increase in interest as the total amount to be paid increases had made his payment Rs 50 by then! If it was a simple interest of Rs 1 per day, the amount to be paid would have been only Rs 23.
In a few months itself, the 7 year old child had learnt the concept of ‘Assets’, ‘rent’, ‘interest’ and a very basic understanding of ‘compounding interest’ and how it can increase (or decrease) wealth substantially. He can understand a conversation about debt since he knows ‘interest’, he is able to see the difference between investing in an asset which generates money versus other expenditure.
We generally use easy to calculate interest method and not a formula and percentage for young children. If the child is older, you can also use interest % instead of a number.
The families that we did this activity with, really enjoyed the experience and the children learnt a lot of concepts (in some cases, it was a reminder of the concepts for parents as well!). I hope you all enjoy it as well. Do write to us and tell us your experiences with the activity.