Teens and young adults have a far better chance of changing the world if they possess fundamental financial skills.
There is just one problem: the vast majority of financial education programs are ineffective. In one of the largest analyses on the subject, financial education was found to be responsible for only a 0.1 percent change in financial behaviors.
As someone who works at a financial institution, that is a tough pill to swallow. Young people are receiving financial education, but it isn’t producing the intended result.
So we decided to do something about it.
Taking a new approach to financial education
For the last two years, the innovation lab at CommunityAmerica has worked with a range of organizations in Kansas City to deliver a financial education program that we call LifeSkills.
We use a non-traditional approach—and it is working.
More than 2,500 students have gone through the LifeSkills program, and we’ve seen statistically significant improvements in goal setting, saving, budgeting, and banking habits.
Our goal to make compound interest stick
Teaching students the value of budgeting is one thing; explaining the power of compound interest to a 10th grader is an entirely different ballgame. But our team wanted to take on the challenge. Here’s why:
It is hard to learn
Chances are most people have heard of compound interest, but very few know what it means. In fact, 69 percent of Americans don’t understand it.
One basic definition of compound interest is, “Interest calculated on the initial principal of a deposit (or loan) and the accumulated interest of previous periods.”
But that definition does not exactly pass the ‘smart fifth-grader test.’
It is an important concept to grasp
While the concept is hard to understand, it also is fundamental to building wealth. Compound interest can cause your wealth to snowball, helping a person amass hundreds or even millions of dollars. This is especially true if students start saving and investing early.
This is also why Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pay it.” Another great inventor, Ben Franklin, described it this way, ‘Money makes money. And the money that money makes, makes money.”
Measuring the outcomes of our approach
This summer, we partnered with Thalia Cherry and her team at Entrepreneurship KC to deliver the LifeSkills program to over 100 high schools in the Kansas City metro area.
The financial education program was delivered every week for four weeks using the following format:
- 30-minute sessions each Monday
- Three sessions were delivered via Zoom; final session was in-person
- Sessions were voluntary and weren’t done for class credit
Each week, LifeSkills covered fundamental money concepts ranging from basic banking, budgeting, saving, goal setting, and investing.
We added a simple experiment because the concept of compound interest is more challenging to grasp than something like budgeting.
During the first week, we gave each participant a choice – they could receive $5 now or wait until the end of the month session to receive $10.
To our surprise, 92 percent of the students chose to wait.
And at the end of the program:
- 30% more teens indicated having heard the term ‘compound interest’
- 29% more teens could accurately define compound interest
The real win was that more students were able to describe compound interest unaided accurately. Here’s a few examples of where they started and ended:
Before: “Don’t know.”
After: “It is interest that you gain on your interest, and it is important to start saving early.”
Before: “Never heard of the term compound interest.”
After: “Compound interest is when you gain interest on the money you put in and any past interest you’ve already made.”
The keys to success
Why did giving students the option of $5 today vs. $10 tomorrow help reinforce the idea of compound interest in such a simple and profound way?
Behind the fancy definition of compound interest is a more fundamental concept: money grows over time. The longer the amount of time, the more money will grow.
Once students understood the concept that, ‘your money grows over time,’ we explained that time is as—or maybe more—important than money.
Even if you only have $10, $20, or $50 to get started, you must get started now and allow time to work harder.
Then we explained the concept of interest. Compound interest is when your interest earns interest. We broke compound interest into smaller parts to make it stick.
Please, please do try this at home…
There are a number of ways any teacher, employer, or parent can apply this. Pennies, candy, stickers are all great things to use.
Break it down the way we laid it out above.
- Level 1 – Compound interest makes your money grow over time.
- Level 2 – Compound interest is when your interest earns interest.
Then, the key is to tie it to a real-world example and reinforce the concept over time.
Start slow but aim to play the long game.
- Give your tween, teen or young adult the option to get $5 now or $10 next week.
- Up the ante to receive $10 this month or $20 next month.
- Extend it to a quarter, then half a year, and then a year.
- Frequently ask them to define compound interest. Don’t let them forget.
Make it real, and the hope is, it will become a habit. When that happens, our next generation of leaders will be well on their way to financial success, which, let’s face it, is the ultimate peace of mind.
This article has been reprinted with permission from Anita Newton’s LinkedIn page.