This column has been provided by our partners at Maclendon Wealth Management, the official wealth management advisor for Grandparents.com. Maclendon is an independent Registered Investment Advisor built on expertise, innovation, and outstanding client service. Learn more at their website.
As we scour the malls for the perfect presents for our grandchildren, so many questions come into play: Clothes or toys? Clothes are tough; kids' sizes are constantly changing. And what brand, what color will they like? Maybe you should avoid clothes and just get a toy. But what is the cool toy? Are they into cars, action heroes or dinosaurs (this week)? How about electronics? You could be the cool grandparent and go high tech. But what gaming system do they have? And what games would they want? Come to think of it, what don't they have? Kids today seem to have almost everything before the holidays roll around.
One solution? Many grandparents decide to give cash for the holidays, and let kids choose what they want to do with the money.
Now you may think cash is impersonal, but there is a way to make a cash gift extremely special. When you hand a child a crisp $100 bill, give him another powerful tool as well: Sit down with him and explain the power of compounding interest.
Albert Einstein said, "The most powerful force in the universe is compound interest." This holiday season, use your cash gift as an opportunity to share an amazing mathematical discovery with your grandchildren. What better time than now to start having financial discussions with your grandchildren!
| Do you ever give grandkids cash on the holiday? |
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Always. They love being able to get what they want. 44.0%
Only for older kids and only when I've struck out at the mall. 41.0%
Never. It's too impersonal. 12.8%
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Let's say Johnny is 5 years old. Hypothetically, if he put your $100 in an investment account, earning 5 percent interest, he would have $105 after one year, and $110.25 after two years. That extra quarter is the power of compounding.
Now consider that when Johnny is 20, he will have $207.89 from your gift. But if you wait until he is 10 to put the $100 in his account, he will only have $162.89 a decade later. The key to compound interest is starting early. The younger you start, the more time compounding has to work in your grandchild's favor. If he starts saving early it means he may be able to work fewer years when he's older – thanks to compounding interest. And if your grandchild anticipates working until retirement, this early start on saving will give them that much more purchasing power in the future.
Take Johnny to the bank and open a savings account with him. Show him how much better off he will be by saving. And to look really smart – show him the compounding formula and how easy it is to compute:
A = P (1+r/n) nt
A = final amount
P = principal (the dollar amount of the gift)
r = rate of interest
n = number of times per year interest is compounded
t = number of years
That $100 bill can start a lifelong dialogue about finance for you with the younger generation. When Johnny buys his first car with the money he saved, he will be so grateful for the gift of knowledge you gave him 15 years prior. That life lesson will be better than any new video game or action figure. So, if you're still struggling to decide on the best gift for your grandchild, consider the gift of compounding interest – the gift that keeps on giving.
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