I can vividly remember the first explicit lesson I had on the power of compound interest. Mr. Bosley, my 9th grade Social Studies teacher, gave our class a quick explainer on why investing early and often was better than getting a late start. Because Mr. Bosley was a believer in making lessons feel personal, the two investors he chose were named after students in the class. There was Emily (that was me!), who got started early, and Joe M. (my classmate from kindergarten through 12th grade), who waited to invest.
In our classroom scenario, Emily invested $150 per month starting at age 18 and stopped at age 40. Joe, on the other hand, didn’t start investing until he reached age 40, and put aside $1,000 per month. They both hoped to retire at age 65 to live off their investments.
Assuming a 10% annual return, the astounding fact was that Emily, even with a much smaller monthly investment and only setting money aside for 22 years (from age 18 to 40) would have $1,392,530 compared to Joe’s $1,180,165 at age 65. (And no, I don’t remember those figures from way back when. I did the math here.)
Way to go, tiny investor Emily!
If only the lesson had stuck. While I certainly remember that class and appreciated the startling financial difference between an early vs. a late start, what I mostly took from this lesson was a sense of vague guilt that I should understand this stuff better.
(To be fair, vague guilt about something that is no way my fault is kind of my jam.)
But my understanding of compound interest felt unrelated to any kind of real world action available to me, because investing itself seemed completely alien. Yes, even though my dad was a financial planner, the specifics required to invest one’s money was to me an enigma wrapped in a mystery topped with a sprinkling of confusion.
Did one just call up the Dow Jones and ask to purchase a stock?
Was there a mutual fund store where you could find attractively-decorated gift baskets of appropriate investments?
Was it necessary to speak fluent Nasdaq when conversing with fellow investors, and did it sound anything like Klingon?
Would one be required to fight the bull and/or bear to access your funds?
(The answers to these questions are not exactly; nope; not necessary and only if you really lean into the consonants; and the animals are purely metaphorical and no one knows for sure why we use them to describe the stock market, in that order).
It took me quite some time, even after I began my career writing about finance, to feel confident with investing. Which is why I want to make sure I teach my kids the mechanics of how to invest, rather than just the magic of compounding interest. Here’s how we’re teaching them.
Start with What You Know
Warren Buffett has famously advised investors to only invest in things they understand—advice no one currently invested in Bitcoin or Dogecoin has followed. However, it’s an excellent place to start investing because understanding a company or industry means you’re in a good position to determine if it is likely to grow or shrink. When you know something well, you’re more likely to follow news about it, recognize when conditions for it are improving or declining, and understand how it reacts to changes over time.
For instance, my husband is an automotive engineer by trade, which not only means his work is more likely to catch fire on any given day than mine, but also that he has very well-informed opinions about everything from new government regulations on emissions to technological innovations from various automotive companies.
His deep knowledge of the internal combustion engine means he can generally recognize how car companies will fare financially in response to (or in advance of) various changes.
You might think that a 10-year-old and a 7-year-old can’t possibly have the same kind of expertise, but if you’ve ever been cornered by an enthusiastic child who wants to tell you about dinosaurs ad infinitum, you know that is simply not true. Kids know a lot about a lot of things, and often things that their