Small Investments -- Compounding Returns

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We at FamilyMint® strongly believe that parents should discuss personal finances with their children and also teach them how to be good stewards of money. Our award-winning money-management certification program for kids was created with that goal in mind. Our program also teaches children about interest and growing their money through the concepts of simple and compound interest. Why not make investing a family activity as well? You might be surprised how small investments can lead to compounding returns.

Albert Einstein called compound interest the “eighth wonder of the world.” Compound interest works like magic, with your money constantly feeding on itself to grow larger and larger. How does it work? It’s easy really. Interest is earned and paid not just on your principal, but also on all the previous interest earned. Your total balance grows faster and faster without you doing a thing!

For example, if you start with an initial investment of $100 and add $100 every year after that, and your money grows at an average rate of 10% per year (in compounded interest paid), you’ll have the following amount over various periods of time:

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What if you were able to invest $1,000 per year? Simply multiply the above numbers by ten. That’s a pretty amazing return on a small investment—all thanks to the power of compound interest!

Want to experiment with compounding? You can use your home calculator or checkout an online calculator.

Looking for an investment tool for teens? Take a look at The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of, a guide for today’s money-savvy teens.

Younger children might enjoy Warren Buffett’s new series, Secret Millionaires Club Volume One, which debuted on DVD earlier this year. In the animated DVD, Warren Buffet narrates his own animated character, and teaches kids about investing in a fun and creative way.

One of the greatest financial lessons parents can teach their children is to invest in themselves. In doing so, parents will come to realize that small investments can, in fact have compounding returns.