From budgeting and income to saving and earning compound interest, kids need to learn how to earn money and make it grow. Communicating some of the more nuanced lessons can be difficult, but compound interest is an easy topic that even the youngest children can understand.
The marshmallow game is a great way to teach kids about compound interest and how it works!
How to play the marshmallow game
Here's how it works!
Simply give a young child a single marshmallow. Challenge your child to not eat that marshmallow, and instead hold on to it for just 10 minutes.
If they succeed in delaying gratification and still have that original marshmallow at the end of the time, they get one more marshmallow. Now you escalate the challenge and the reward.
If they don't eat either of those marshmallows for another 10 minutes, you’ll add on two more. If they can delay gratification and invest in the “future,” at the end of 20 minutes, they'll now have four marshmallows.
At the end of the game, explain that this is how compound interest on a savings account works. You leave your money unused in exchange for the reward of making more money. Just as those tasty marshmallows added up, so will their money.
Now show your math
This works best if your child already has a general understanding of multiplication and percentages
When you deposit your money in a bank savings account, you earn interest. So if you open a savings account with $1,000 and your interest rate is 2%, at the end of the year, you’ll have $1,020, even if you made no other deposits throughout the year.
The next year, if you don’t touch that money at all, you’ll earn 2% on the total balance of $1,020. At the end of the second year, you'll have earned another $20.40.
This repeats over time, gradually earning more interest each year.
Sounds sweet, right? It is!
Compound interest is one sweet lesson to learn, no matter your age
For you kids-at-heart, let’s take a look at how the idea of compound interest can affect line items on your budget.
In an excellent video blog, financial literacy activist Rachel Cruze uses some very down-to-earth examples to explain how compound interest can turn a car payment or average credit card balance into big bucks if you were to save that money rather than spend it. Cruze points out that banking the average monthly car payment of $478 between the ages of 20 and 60 would yield more than $2 million thanks to compound interest!
So go on! Dig through the pantry to teach the marshmallow game to your children. And think about ways you might be able to leverage compound interest to build your wealth, too.