“Working to help parents raise money-smart kids.”
Hello, friends!
It’s time for your start-of-the-week money-smart quiz, brought to you by the Global Financial Literacy Excellence Center (GFLEC).
I know what you’re thinking: It’s way too early in the week to be getting tested. But I have good news for you! This quiz is just three questions long, it will take you under a minute to complete and no one but you will know how you did. 🙌
I hope you participate, as the three questions the quiz poses conveniently provide the framework for this week’s “3 Ideas to Share & Save.”
Just in case, though, I’ve included each question at the beginning of each section below.
— 1 —
Compounding
Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
- More than $102
- Exactly $102
- Less than $102
I’m guessing that as a reader of this newsletter, you knew the answer was “More than $102.” In fact, it’s $110.42 (compounded annually). 🤓
What I appreciate about the quiz’s design is that its questions aren’t complicated. (While I’m competent in math, I certainly don’t consider myself a “math person.” And odds are that you don’t either.) Because this particular question’s time horizon is five years, we don’t need to do any complicated calculations to identify the answer and to realize it’s highlighting the power of compounding.
Of course, compounding’s true power comes with many more years. Plus, time’s effect on money is a difficult concept to communicate to our kids. We are not future-oriented as a species, and we’re even less future-oriented as young humans.
Still, it’s worth showing our kids a compounding graph, like this one from our website:
And if you have tweens and teens, then please have them take a look at this short from our “Good Money Habits” video series to learn about the importance of treating our future selves well.
Are your kids going to have epiphanies and thank you for changing the course of their lives?
Uh … unlikely!
Still, you will have planted a seed of foundational financial understanding by introducing them to two important concepts: being kind to our future selves and hyperbolic discounting. (Don’t know the latter term? Watch the video!)
(Not-so-humble brag: My daughter actually did write a college essay about being good to her future self. 🥲)
— 2 —
Inflation
Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, with the money in this account, would you be able to buy …
- More than today
- Exactly the same as today
- Less than today
Unfortunately, the timing couldn’t be better for this lesson. Take the price of eggs, for example:
Virtually every kid can understand that the $5.99 which bought us a dozen eggs a month ago won’t buy us the same number of eggs today. Of course, we are fairly fortunate here in the U.S. that these kind of extreme pricing events don’t happen often.
Nevertheless, we can pair this egg-cellent (Sorry! 😜) lesson with the one above about compounding. For one of the reasons we want to invest our money is to have a reasonable chance of outpacing the inflation that inevitably occurs.
Moreover, today’s high inflation rates present us with an opportunity to show our kids why we’re teaching them these concepts. And while we’re at it, it’s important to point out that even if we don’t always feel inflation’s effects so strongly, they are always present in a healthy economy.
(🚨 Smart shopper alert! 🚨 Trader Joe’s has so far managed to keep its egg prices close to last year’s levels. But plan to show up early to snag a carton!)
— 3 —
Investment Risk
Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.
- True
- False
This final question addresses a topic we’ve discussed in this newsletter many times, including as recently as last week: Purchasing individual stocks is riskier than purchasing mutual funds.
To this point, Popcorn Finance podcast host Chris Browning and I talked about the value of “boring” investing on my podcast:
And if you’re looking for other interesting perspectives on investing, then watch these short clips of my conversations with financial psychologist Brad Klontz and financial planner Jessica Willis:
Well, I hope “The Big Three” quiz from the GFLEC didn’t cause you much anxiety! Instead, I trust it provided you with several money-smart ideas to share with your kids.
And if you happened to get one or more of the questions wrong, then please use the quiz as an opportunity to improve your own knowledge. I want us all to feel empowered to be our kids’ guides on this money-smart trek we’re all taking.
Until next week, enjoy the journey!
John, Chief Mammal
P.S. Please consult with a financial or investment professional before engaging in any decisions that might affect your own financial well-being.
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