finance 101

sometimes the light just comes on…and it surprises you too!

tonite i was talking to kai about the money he got for christmas and his birthday, quite an amount because he is away so rather than give presents, quite a few of the family gave money. I suggested to him that he should consider putting some of it in his long term saving fund, he had a think about it and decided to put $50 in.

His saving fund is mainly comprised of money he has earned in being a partner in the coffee business, an approach I decided on after he expressed an interest in how my coffee business worked and how it was different to a ‘normal’ job. I saw it as a great opportunity to explain the difference between business income and employent income. So I made him a ⅓ partner in the coffee business so he could see first hand how the economics worked compared to a job like emptying the dishwasher that just earnt him a ‘wage’.

I then showed him the spreadsheet on his savings, showing him how the interest component was increasing thanks to the power of compounding. I tried in simple terms to explain the magic of compounding and how it was the only certain path to financial independence, and that the only sure path to wealth was slowly, starting early.

I was encouraged by how well he grasped the concept, he used the comparison of number squaring, (2,4, 8, 16,32, 64..) to show that he understood the power of exponential growth. So on that basis I told him I was so impressed by his knoweledge of the concept of compound interest coupled with wealth creation that I would give him his $50 back, while leaving the balance of his account increased by the $50.

He promptly turned around and said, “thanks Dad, please put another $25 of my money in my account.”

Nothing could have exemplified his understanding of what I had been trying to explain better than this, I asked him if he understood how much he had increased his savings in what had transpired, he replied, ” yes, for $25 of my present money my savings have increased $75.

I could not have been more proud!