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Introduction to Interest
How understanding compound interest can turn small savings into substantial wealth
Kamil Banc
June 26, 2024 • Estimated Reading Time: 5 minutes
Money doesn't materialize out of thin air, but it can multiply in the bank. This week, we're exploring the world of interest - the silent force that transforms your savings into wealth.
Parents, ask your kids: "If you had a magic jar that doubled your money every year, how much would you have after a decade?" Do the math together 🫠
"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."
Einstein's words highlight the power of compound interest. When you earn interest on your savings, and then earn additional interest on that interest, your money grows exponentially over time. This "interest-on-interest" effect can turn small, consistent savings into substantial wealth in the long run.
MYTHS
Let's bust some common money myths that might be holding back your financial growth.
Myth: You need a large sum to start investing.
Truth: Even small, regular contributions can grow significantly over time. It's consistency and patience that matter most.Myth: All investments grow at the same rate.
Truth: Different asset classes have varied growth rates. Stocks, bonds, real estate, and gold all perform differently over time.Myth: Gold always outperforms other investments.
Truth: While gold can be a good hedge against inflation, it doesn't always provide the best returns. Historically, stocks have often outperformed gold over long periods.Myth: Interest rates don't change much over time.
Truth: Interest rates can fluctuate significantly, affecting investment returns. Understanding these changes and adjusting strategies accordingly is important.
STORYTIME
Grandpa's Garage Wisdom: A Tale of Two $100 Bills
Jake was helping his grandpa clean out the old garage when he stumbled upon a dusty, vintage gas can. Tucked inside was a faded $100 bill and a worn stock certificate, both from 1970.
"Grandpa," Jake called out, holding up his finds. "What are these?"
Grandpa's eyes twinkled with nostalgia. "Ah, my boy, you've uncovered a time capsule of sorts. Let me tell you a tale of two Benjamins."
He took the items and sat on an old chair, patting his knee for Jake to join him.
"Back in 1970, I had just started driving. I remember pulling into the gas station with my shiny new Ford Mustang, this very gas can in hand. The attendant filled it up, and I handed him this $100 bill. He gave me change for seven more fill-ups!"
Jake's eyes widened. "Eight full tanks for $100? That's incredible!"
Grandpa nodded, then pointed to the stock certificate. "That same day, I took another $100 and bought shares in an S&P 500 index fund. It wasn't easy to resist spending it, but I wanted to see what would happen."
He pulled out his smartphone, chuckling at the contrast between the old gas can and modern technology. "Let's see how our two Benjamins fared over the years."
After a few taps, Grandpa showed Jake the screen. "Today, that $100 bill would barely fill the tank once. But the $100 investment? It's grown to $22,419!"
Jake's jaw dropped. "That's enough to fill up the tank... how many times?"
Grandpa laughed, "At today's prices? About 280 times! That's the power of compound returns, my boy. The $100 bill lost its fuel over time, but the investment kept the engine running and then some!"
Jake nodded, a new light in his eyes. He looked at the old gas can with newfound respect, understanding that it held more than just memories – it held a valuable lesson about the power of investing.
The End.
BREAK IT DOWN
Age 3-5
Money can grow over time if you save it in a special place. It's like planting a seed and watching it turn into a big tree!
Age 6-10
When you invest money, it can grow much faster than if you just save it. It's like having a magic piggy bank that makes extra coins appear over time.
Age 11-14
Investing in the stock market can help your money grow faster than inflation over long periods. This is because you're buying small pieces of successful companies that can increase in value and pay you dividends.
TIME FOR ACTION
Design Your Own Time Capsule: Encourage your kids to predict future prices of common items and their own savings goals. Write them down and stuff it in a box. (open in 3 years from now)
Play the "Doubling Dollar" game: Start with one dollar and double it each year for a decade. Use play money or a calculator to show the rapid growth.
Create an "Asset Class Race": Set up a chart comparing different investments (stocks, bonds, real estate, gold) over time. Use real historical data like in the image below to show how different assets grow at different rates.
How will you introduce the concept of interest to your children this week? Hit reply and share your creative ideas with us!
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