Teaching kids financial basics in a zero interest rate environment

[Anonymous]

Anyone else notice how difficult it is to teach kids basic finance, like compound interest, delayed gratification, the time-value of money or why not to keep your savings under the mattress in this very abnormal economy? I tell them the standard explanations, then they get their bank statement with 2 or 3 cents of interest. I'm concerned that these lessons may never be learned and will carry through their whole life.

[Anonymous]

Fair point. It's also the Big Lie for people who thought they would retire and get 6, 7% on CDs.

That said, I don't think this is an abnormal economy. I fear this is the new normal and will be for a while.

[Anonymous]

You can either pay them an artificial rate of interest from the bank of Mom and Dad, or look around for a bank with slightly better rates for kids (I think Cardinal offers a kid's bank account that pays better than average on the first $1000 or so)

[Anonymous]

Yes, we have this problem with our middle schooler.

[Anonymous]

I grew up in this kind of economy, more or less. I'm in my mid 20s, and as far as I can remember, I have been extremely unimpressed by interest from savings accounts, and I tend to not keep that much money in cash, aside from some for emergencies. I had one of those "junior" saving accounts growing up, and I would see my statement and think "big deal, a few cents." I have an online fidelity account where I invest in the stock market in various investment vehicles, mostly index funds and ETFs. My dad taught me about this when I was in college, and these days I definitely appreciate how money grows as you save. He had a portion of my college savings in stocks instead of just in a 529, I guess for increased flexibility, and he engaged me by researching which investment vehicles to purchase and sell, teaching me stuff about expense ratios and cost basis and so on. We would pick investments to buy and sell together, and as I got older, I got more and more say about how my portfolio should be allocated.

However, when I was younger, we frequently had these things in math class where we would get X amount of money to invest in a stock market simulation for 6 weeks or so. It was some educational software tracked the actual stock market, and we could trade. It was supposed to familiarize ourselves with the notion of investing, but when I was that age I also didn't get it--at the end of the six weeks I had usually lost most of my money. Perhaps that in and of itself was a good lesson to not day trade and gamble money on the stock market, since now I am much more of a put money in a low expense ratio index fund and let it grow for several years kind of investor. But at the time, it just made the stock market seem scary.

Since you are not getting any real growth from a bank account, maybe you could start with a couple thousand dollars in an index fund or a few shares of an ETF, and give them the option to add money for savings and watch it grow. Then when they are older, you can give the money to them, and they will have a nice nest egg to start their adult life or help pay for school or whatever. I think being reasonably savvy with how to invest one's money is going to be more and more important, now that there are so few other vehicles that have a reasonable interest rate.

[Anonymous]

As long as they don't have too much in savings, you could personally pay them 5-10% interest to encourage them to save and explain that 5% is closer to the long-term average for CDs.

[Anonymous]

For strict Muslims it has always been a zero interest rate environment. I am using this opportunity to teach the basics of Islamic finance. It is also an opportunity to teach about unconventional monetary policies at the zero bound.

[Anonymous]

Anonymous wrote:As long as they don't have too much in savings, you could personally pay them 5-10% interest to encourage them to save and explain that 5% is closer to the long-term average for CDs.

This would be a disastrous lesson to teach them, and will result in them underfunding their pensions in future years.

[Anonymous]

Depending on how old the kids are, the time value of money concept may be too complex to learn, especially given the amount of time they are kids and their financial decisions in those times. It's more effective to teach them budgeting - give an annual budget for clothing or something, and have them make their decisions. So if they spend it all on 1-2 items, That's it - that's all the clothes they will have.

May want to have them invest in a stock or two too - that changes more than a savings account, and thus is more "exciting."

[Anonymous]

Anonymous wrote:

Anonymous wrote:As long as they don't have too much in savings, you could personally pay them 5-10% interest to encourage them to save and explain that 5% is closer to the long-term average for CDs.

This would be a disastrous lesson to teach them, and will result in them underfunding their pensions in future years.

if the lesson is specific to CDs, then sure. but i don't think 5% is unreasonable expectation for retirement savings generally.

[Anonymous]

why not teach them the correct thing to do with zero interest rates?

[Anonymous]

Anonymous wrote:

Anonymous wrote:As long as they don't have too much in savings, you could personally pay them 5-10% interest to encourage them to save and explain that 5% is closer to the long-term average for CDs.

This would be a disastrous lesson to teach them, and will result in them underfunding their pensions in future years.

I was assuming that we're dealing with elementary school aged kids and OP just wants to teach them that if you save money, you'll end up with more money later. Venturing into the stock market would be a way to do this, but you run the risk of spooking the kids in downturns.

[Anonymous]

I give my 7-year old $5 each week for allowance. $3 he gets to keep, $1 goes to a college fund, and $1 goes to a charity fund. When the college fund gets to $10, I take it, match it, and transfer $20 to his savings account. When the charity fund reaches the same amount I also match it, and we pick somewhere to send the check (usually the local animal shelter).

I don't know if he's learning much about interest but he is starting to understand the benefits of saving, and the importance using some of his good fortune to help others.

[Anonymous]

teach them how to borrow money and invest it like a margin account

[Anonymous]

OP here- Some interesting approaches mentioned.
I had in mind relatively simple questions about how finance and the economy works. When their ""piggy bank" fills up and i tell them that it is time to put money in the bank, they naturally ask why. I think that some concepts (the bank will pay you interest for the use of your money, it then takes that money and lends it to other people and charges them interest to use it) are so foundational to the entire economy, that it is difficult to understand very much at all without them.