I remember growing up with toys that didn’t have wireless controllers, USB drives, or online accounts. Sounds prehistoric, huh? My brother and I would save all of our birthday money (we are twins, so each birthday meant twice the cash) and then buy a game system or some other big item. I remember saving for a really long time and finally reaching $120, so that we could buy a brand new SEGA Genesis. Today, I can probably find one on eBay with 20 games for less than $20!
We didn’t have all the popular toys of the 80’s and 90’s, but I do remember seeing a few of these toys around our house on a birthday or at Christmas. Can you remember a few of these? :)
- Skip it
- Cooties / Don’t Break The Ice
- Easy Bake Oven
My parents didn’t make a lot of money growing up, so I feel pretty fortunate looking back at the times when they’d spend $30-$50 on a birthday or at Christmas. Add that up for five kids, and you’re spending a lot of money.
I could go on and on about the calculations of compound interest and how that $120 we spent on the SEGA Genesis would have grown to be over $8,000 if we bought Apple stock at $4.50 a share, but good luck telling a 10 year old he should buy a stock certificate instead of Sonic the Hedgehog. Kids don’t realize the power of compounding when they’re 10 and most don’t figure it out until they’re 30 or 40!
Although I don’t have kids today, I thought, “How can I show my kids the impact of compounding one day?” Here’s my thought…let me know what you think of it.
Create a “Compounding-lesson” Fund
What if you spent $75 on your kid for their birthday, but put aside $75 each year into a savings account. Do the same for Christmas and you’ll be saving $150 each year in the ‘compounding-lesson’ fund? That’s $12.50 a month – not a bad investment into your kid’s financial future.
How’s that shape someone’s view on compounding? I sure didn’t save my birthday money, but if my parents pulled out $6,000 today and told me that they had been saving $150 every year, I’d be pretty impressed with how it grew into so much. Being the financial geek that I am, the idea of a two-year IRA max challenge would be interesting. Each year that my child maxes out their IRA, I’d give them half back – essentially matching their contribution. If you do this for two years with funds from the ‘compounding-lesson’ fund, they could have over $10,000 saved in an IRA by the time they’re 20. Even if they didn’t contribute another dime to the account, simple compounding at an overly conservative 5% for 40 years would grow to almost $250,000. I think the key is getting your child to have a stake in the game, and with a little incentive to save in an IRA, they’re starting on a great path to savings.
Sounds like a pretty cool idea to me…what are your thoughts?