Teens of the World: Behold the Snowball
This month, the TIAA Institute released findings of a financial literacy study conducted with teens. The results? Let’s just say #facepalm. It appears that teens have a very difficult time understanding the concept of a snowball.
Yes, the object at the top of to-do list the moment a snow day is called.
Yes, the sphere that takes shape at an exponential rate through rolling.
And no, not literally.
Today, we’re talking about snowballing as a concept. The snowball effect, if you will.
Translation: today, we’re digging into compound interest.
When asked the effect of simple interest on a $100 investment after a single year, or the relative safety of stocks and bonds, only 19% of teens were able to answer correctly.
Why is this such a big deal? Ask the ultra-wealthy the secret to success, and their answers are likely to vary. But remind them of the importance of compound interest, and they’re likely to change their answer on the spot. Why? Compound interest is often the secret ingredient in any successful investment.
Merriam-Webster defines it this way:
“interest computed on the sum of an original principal and accrued interest”
In other words, it’s interest on interest. Making money on your money that’s making money. Sounds good, right? Let’s look at an example. This chart from Dave Ramsey reveals the power of compound interest through a few $2000 investments at an early age as compared to many, many more by an adult:
Image: Dave Ramsey
Did you notice the zeros? By making a few steady investments early, a teen is able to far exceed the nest egg achieved by a “grown up” who waits a few years to begin their investments. Talk about a benefit of being a Biz Kid. Here’s how the hosts of Biz Kid$ explain the concept:
What’s the ultimate lesson here? Teens actually have a major advantage over adults when it comes to compound interest. Why? Time is on their side. And with compound interest, time is money.
The safest way to earn compound interest is with a certificate of deposit, or a CD for short. These earn guaranteed interest that compounds annually. For those who can stomach a bit more risk, investing in stocks can do the same, but one can also lose their money if a company performs poorly or the economy takes a hit overall.
Are you a teacher looking to educate your students on the power of compound interest? Download our free lesson plan, How to Turn $100 into $1,000,000.
Want to give your teen a crash course in growing their money? Our online course is a self-guided journey through making, growing, and saving. It includes hilarious sketch comedy, inspiring profiles of real young entrepreneurs, and educational content you can take to the bank.
