Three Signs Kids Grok Compound Interest

If you “grok” something, you really “get it.” It’s a term coined by the Sci Fi author, Robert Heinlein. It subsequently flourished in computer nerd circles — of which I have been a member since the early 80s. 🤓

How do you know if your kid groks the incredible power of compound interest?

Wait, let’s pause for a second...

You are rewarding your kid with parent-paid compound interest, right? If not, stop. See the setup instructions here.

If you need convincing first, read this classic article from the archives: Why a Traditional Bank Savings Account Doesn’t Teach Your Kid How to Save.

Need even more cajoling? Let’s try peer pressure and some numbers. 22.4% percent of FamZoo parents are already issuing parent-paid interest. For the record, my favorite delivery timeframe is weekly. The rapid frequency tends to maximize impact. Need a benchmark to help settle on a rate? The average weekly rate that FamZoo parents are paying right now is 1.11%. Pro tip: drive the point home with card activity alerts. That way, kids are constantly reminded that compound interest is working its magic in the background — week in and week out.

Why the hard sell? Some kids grow up never even knowing that compound interest is a thing. That’s a financial tragedy. This fundamental knowledge hole yields adults who are either late to the saving and investing party or miss it altogether. No bueno. Our mission is to get kids to that compounding party as early as possible — and never leave. It’s the only party I know where the earlier you arrive and the longer you stay, the better it gets. 🥳

Unpause...

Now that we’re all on board the parent-paid interest train, how do we know when kids are truly getting the message on the life-changing power of compounding?

Eventually, every compound interest earning kid has an epiphany: “My money is making money! I'm not even lifting a finger! Sweet!”

Assuming your kid doesn’t simply blurt that out to your face — likely for fear of you shutting down the Bank of Mom/Dad gravy train — here are three telltale signs that little Johnny or Suzy gets it:

1. Transfer requests reverse direction. Before the epiphany, transfer requests invariably involve moving funds from saving to spending. It’s spend, spend, spend! But eventually, if the interest rate is aggressive enough, kids put two and two together. “Hmmm. The higher my balance, the greater the reward. I’ll make more if I leave more in there!” That’s when the tide reverses. Kids start asking to move dollars from spending to saving instead of vice versa. Before long, it's save, save, save!
2. Interest payments exceed principal additions. Lauren from the Financial Independence, Retire Early (FIRE) community calls this inflection point “Childhood FIRE” — the moment when her “youngest (almost 8) now has so much in the Bank of Mom that the interest being kicked off monthly is now equal to his monthly allowance.”

   Lauren observes: “We talk about FIRE, savings, and investments enough in the house... but once they started SEEING how compounding worked, it made them excited.”

   That said, if the idea of your FIRE youngster retiring from their weekly chore duties because they have achieved early financial independence scares (or annoys) you, I recommend setting up a Chore Fail Chart as a deterrent.

3. You’re capping your interest payments. Houston, we have a problem. Once your kid’s really killing it on the compounding front, your Bank of Mom/Dad might just blow up. To avoid insolvency from your little saver-on-steroids, you’ll want to impose a cap on payouts or renegotiate the rate.

   You can also sweep funds into a traditional banking or brokerage account when appropriate. Once he turned 18, my son linked his savings card account to Robinhood so he could periodically pull funds out and make some of the investments we had been discussing. That’s when he grokked just how insanely great my Bank of Dad guaranteed return was! 🤣

Johnny and Suzy now know that money makes more money all by itself when it compounds over time. Genius!

You can talk about the magic of compound interest all you want, but kids need to see it and live it to really grok it.

Grok on!