Teaching Your Kids How Interest Works

While your kids may already understand the concept of saving, teaching them how interests works may require more explanations.

Here are 5 way you can show your kids the concept of interests.

1 – Reward savings

When dealing with financial principles, children learn watching rather than reading. You can use your child’s allowance to teach them about interest as well as how to be responsible with money.

Have your child set up a predetermined percentage aside from her weekly allowance. Make your kids save 10 percent or a dollar every time you give them their $10 allowance.

Explain to them that for every dollar they save, you will add a quarter to add to their savings. More savings, more interest.

Let your children monitor their savings during month-ends and let them figure out how much they saved and how much they earned from interest. Have them open a savings account once they get the idea to help them continue the practice.

2 – Borrow from them

To teach kids about the cost of borrowing, try to borrow from their allowance and pay it off with interest.

Wait until your child has saved up a little and borrow a relative amount.

Keep the money for a while, and thank them for letting you borrow money. Afterwards, tell them that you are ready to pay it back and include an extra 10 percent from your borrowed amount.

Explain to your kids that the extra 10 percent is the cost of you borrowing money from them. Do this things a few more times and it your child will understand the concept well. They may even ask for more interest soon.

3 – Be the lender

Before teaching your kids about credits, make sure they understand the while getting a loan and paying it back concept.

The best time to teach them is when your child wants something that their savings can’t afford yet.

Offer them a loan. For instance, if they need to buy something worth $20 offer to lend them the amount given that they pay it in bits with their weekly allowance. For instance, if they have a 30$ weekly allowance, tell them you’ll give them $25 for the net 4 weeks instead as payment.

Keep track of your child’s paying habits and check the progress. Once you feel like your child sees and understands the concept, introduce the idea of interest by charging them weekly.

4 – Tell by showing

The best way to teach kids about credit cards is to show them how it works. Show the bills, and show the terms.

Also make sure that your children will know how important it is to work twice as much to pay off your loans with its monthly interests. Get through the lists/ bills with them and jot down how much each item costs and how much each price grows with interest.

5 – Give them credit card power

Make you kids experience having a credit card – by using an index card to record the details. How much money he/she can borrow, and what terms you employ. You may say that the card Is worth $40 dollars, and it would cost your child $5 per week until it gets fully paid. To apply the concept of interests, you can also charge your child $1 each week that they fail to pay the debt.

When your child opt to use the card, let him/her. However, it is very important to enforce the terms agreed upon to teach your kids that using something that’s not yours or you don’t have, you have to repay it with a little more than what you borrowed. It’s simply paying the cost of borrowing.

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