Beyond the Bank binders include a category called Invest. It's intended to be a very long term savings and possibly a way for kids to start learning the concepts of compound interest. Here are three ways this section can be used, depending on how involved the parents or adults want to be.
1 - A simple long term savings category
The Save category is designed for short term savings - teaching kids about delayed gratification and how to recognize their values as they add items to their Wish List and save up to buy them. But the long term savings category is just as important for building the skills that will help them save up cash cushions and retirement accounts as adults. Treating the Invest category as a savings account that they always add to but never take from will get them started on thinking about money as something that will always be there for them in the future.
2 - A long term savings account that earns interest
Compound interest is a hallmark of the American economy and time is its greatest asset. You can decide to pay your child interest on the money they put in their Invest account and they can start to see the effects of how compound interest helps their money to grow even faster. If your child is just starting out in building their long term savings, you might want to offer them a higher interest rate, so they can see the effects more easily. But over time, they'll start to grasp that the money they earned in interest earns even more money in interest as they see their account value grow. Here's how to calculate and pay them interest:
- Decide what annual interest rate you want to pay and how often you'll pay it. For example, say you want to pay 5% APR (annual percentage rate) and you want to pay it monthly.
- Divide the annual interest rate by the number of payments. In this example, you first convert the interest rate from a percentage to a decimal by dividing it by 100. So 5 ÷ 100 = 0.05. Then you divide that by the number of payments, so 0.05 ÷ 12, which equals 0.00416. This is the interest rate paid each period.
- At each payment, multiply the rate you calculated in step 2 by the balance in the account. This is the amount of interest earned that period. In this example, let's say the balance was $20. So 0.00416 x $20 = $0.08. The interest earned for that month would be 8 cents. (You can see how higher interest rates early on might help kids grasp the benefits better.)
- In the Invest ledger, add an entry for the interest. In this example, say the interest was paid at the end of January. Then the entry might say, "January Interest, +$0.08, Total = $20.08.
- Now actually pay your child the interest so they can add it to the money in their zipper envelope. If you don't want to bother with all the coins, you can use the Interest Tracker to keep a separate tally of interest payments until they equal a dollar and pay it out then.
3 - A holding ground for a savings account at a bank
If you like the idea of kids learning about compound interest, but don't want to bother with paying it yourself, help them open a savings account at a bank. The Invest category can be used to hold on to money until they transfer it to the bank. If they don't receive paper statements in the mail, help them access the statements online so they can still use the ledger in their binder to track the interest paid each month. This keeps them aware of the money they are saving and lets them see how compound interest is working for them.
Do you use the Invest category in a different way? We'd love to hear about it! Tag us on Instagram @beyondthebankbinders or send us an email and maybe we'll feature your tips in an upcoming post.