Friday, June 10, 2016

Quiz Your Kids On Inflation

Today’s fantastic family finance article is:

Challenge your child to this pop financial literacy quiz:

Suppose you put some money in a savings account earning an interest rate of 1% per year. Suppose inflation is 2% per year. After one year, how much will you be able to buy with the money in this account?
  1. More than today
  2. Exactly the same
  3. Less than today

Puzzled look?

Imagine pouring water in a leaky bucket. Pour less in the top than is draining out the bottom. What happens? The water level sinks. Eventually the bucket will be empty.

The bucket is like a financial account.

The water poured in the top is like the interest earned by the account.

The holes in the bottom are like inflation.

The water level is the value of the money — its purchasing power.

The bottom line: if an account doesn’t gain more in interest than it’s losing to inflation, it’ll be worth less and less over time. In other words, you won’t be able to buy as much stuff with the money in your account tomorrow as you can today.

Now here’s the parental portion of the quiz: Is your kid’s long term savings in a slowly draining bucket? What are you teaching your kid about beating inflation?

Maybe it’s time to teach your kid another “I” word: Investing.

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