Teaching Kids About Money: Understanding Time Value of Money

One of the reasons we camp is because we enjoy maximizing experiences while also being frugal. But, being frugal is only one part of what we try to teach our kids about money.

When my first child turned 4, I began teaching her about money. Sometimes, those lessons emerged on the toy aisle at the store — the place where many parents’ will power dissipates with the slightest of tantrums. Sometimes, it was when she received a birthday check from a family member, and we gently urged her to consider whether she really wanted that mega bag of gummies, or whether she would like to save for something more important down the line.

Those early lessons for children are important. Financial lore is littered with cautionary tales of NFL superstars and lottery winners who went bankrupt after raking in the dough, because they didn’t have a healthy relationship with money.

As each of my children mature, I begin to ask questions to gauge their understanding (or capacity to understand) key money ideas.

Today, we discuss one of the questions that every child and adult should be able to answer. It is foundational to all other financial decisions.

“If I give you $1 today, and you put that $1 under your mattress, how much will it be worth in 1 year?”

The natural response from adults and children alike is, “$1. Duh.”

They are both wrong.

Why are they wrong?

The reason boils down to inflation.

In the 19-teens, you could buy a 10-room house kit from the Sears catalog for only $2,065. A nickel in the 1920s would buy you a glass bottle of Coke.

A 10-room house today will cost you at least $250,000, and a plastic bottle of cola will run you about $l.35.

When you tell a child today that their $5 allowance would have bought them 100 glass bottles of coke in the 1940s, that is illustration enough.

Without going into all of the factors contributing to rising prices, we can summarize it simply as “inflation.” The costs of goods rise, and the price of living goes up year-over-year. Since the 1980s, the annual rate of inflation has ranged between 1-5%. For the last decade, it has remained constant around to 1-3%.

To keep it simple, let’s assume a 2% annual rate of inflation.

That means that in 1 year, that $1 will buy you 2% less than it does today. In effect, it will be worth 98 cents. In 5 years, $1 under your mattress would have the buying power of 90 cents. In 10 years, it would have the buying power of 82-cents.

How to help your kid understand.

In school, kids count out things in hundreds for the “Hundredth Day of School.” Borrowing from that idea, consider counting out 100 M&Ms, Skittles, Smarties, etc.

After they get excited, reach in and eat 2 of them. Then, watch their eyes bulge.

Smile and calmly explain that, if they hid those candies under their mattress and didn’t do anything with them, it would be as if 2 of their candies simply disappeared over the next year. They would only have 98 candies left.

Then, reach in and eat 16 more. Their eyes should really get large, and they will likely throw a fit.

Calmly explain that 10 years from now, if they did nothing with their candies under their mattress, it would be as if they only had 82 candies left.

Those 100 candies in the future simply wouldn’t give them as much satisfaction as they would today.

Why does this matter?

Some people might ask, “Why bother saving? If I know that $1 will be worth 2-3% less a year from now, shouldn’t I just spend it?”

We also encounter a sad reality:

  • In 2017, US News reported that 78% of households live paycheck to paycheck.
  • In 2018, Money Magazine reported that 40% of households couldn’t handle a $400 unexpected expense.
  • In 2016, Forbes reported that 45% of families have no retirement savings.

But, the answer to this sad reality is simple.

Ask yourself these 3 questions.

  • Do I have enough money in my emergency fund?
  • Will I be fine if I can’t withdraw this money in less that a week?
  • How much interest am I being charged on my existing debt?

Save for an emergency.

In most circumstances, it is easy to invest to outpace inflation. But, many savings accounts are not the way. Bank of America, for example, pays less than .1%. So, putting the money in a low-earning savings account isn’t enough.

There are, however, high-yield savings accounts like Discover, Ally, or American Express that pay more than 2%.

While you won’t make money after factoring inflation, you will at least keep pace with inflation. If your goal is to keep liquid cash on hand (money that you can withdraw quickly), then a high-interest savings account or money market account might fit the bill. It allows you to preserve the value of your money, while working to build an emergency fund.

Save for an almost-emergency.

If you can do without that money for 12-24 months, then a CD provides a secure way to earn slightly more than a high-yield savings account. Some 24-month CDs are at roughly 2.9%.

Invest to earn money.

If you have money to cover reasonable emergencies, then you would be better off investing in something with the potential to earn even bigger. Many mutual funds over the last 3 years, for example, have earned 7-18%.

Understand, however, that the potential to make a higher return exposes your money to greater. Your strategy should depend upon your ability to absorb risk. If there is a 3-4-year decline in the market, like in 2008, and you think you will need the money, this may not make sense for you. If you have 10 years or more to let the money work for you, the ups and downs may offset.

(There are other investment opportunities with less risk that could grow your money 5-7% as well. You would want to find a reputable financial advisor to explore your options.)

Make money by paying down debt.

This one often catches people by surprise.

If you already have reasonable emergency savings, but you hold debt like most Americans, the next best option for you is actually to pay debt.

Here’s why.

  • In 2016, the average interest rate on a credit card was 13.46%.
  • In 2019, the average student loan rates were 4.81% for undergraduates, 6.38% for graduate students, and 7.44% for parents taking out PLUS loans.
  • In 2019, the average car loan is 4.21% for 60 months.
  • In 2019, the average home loan rate is 4.37% on a 30-year fixed rate mortgage.

Because each of these would cost you more money than the rate of inflation, you would be “earning” money by “saving” interest.

The added advantage is that this strategy has a net effect of improving your credit score. (The discussion of credit scores is for another day.)

The idea for kids.

Returning to the illustration for kids — add enough candies to put their collection back to 100.

Explain to them that, if they save their candies reasonably, they can earn 10 (10%) by next year. Add 10 candies to their pile.

Then, explain that if they continue to save their candies, those 110 candies will earn another 11 (10%) candies in year 2. Now, they have 121.

Once more, tell them that if they save, they can earn another 12 (10%) candies in year 3. Now, they have 133.

Suddenly, they have a bad year. They lose 20 (15%) of their candies in year 4. But, they still have 113 remaining.

They had 3 good years and a bad year. And, while the bad year hurt, they still have 13 more than if they hadn’t saved.

You ask, “Was it still worth saving?”


It is funny now, with my 12-year-old, to listen to her verbalize her understanding of money. We still continue an open-book discussion with our children when it comes to finances. We explain “why” we make certain choices, which things we buy, which things we do without, and how we make those decisions.

And, every ones in a while, my two oldest children will receive money for Christmas and say, “Daddy, can you put this in my savings account? I want to make money while I save for my new ___________.”

That’s when you know you’re winning.

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