At some point in your parenting career your kids are likely to come to you asking for pocket money or asking for a pay rise in their pocket money!

Whatever your decision, this is a great time to talk to your kids about financial literacy, and this all begins with their understanding of exponential relationships and the power of compound interest.

Don’t worry! This isn’t going to be a difficult maths lesson, but rather a fun maths riddle to ask your kids. If you end up suitably impressed with their response and understanding, you might just reward them with a pocket money bonus after all 🙂

Ok, so let’s dive right in.

Let’s say your child asks for $10 pocket money a week.

Ask them this question in return:

“Do you really want $10 each week or would you prefer I give you 1 cent this week, 2 cents next week, 4 cents the week after, 8 cents the week after that and so on?”

No doubt their first reaction will be that you’ve gone a bit crazy, what can someone be expected to buy with 1 cent or even 8 cents??!! Encourage your child to go away and think about it for a little while.

Hopefully they come back to you asking you to pay them with the second option after having realised the power of exponential growth. Never mind if they haven’t, here’s the opportunity to discover that power with them.

Either on paper on or by using a spreadsheet, work out with your child what the first 6 months or 26 weeks of pocket money will look like.

At $10 a week it should be easy to calculate that after 26 weeks they will have received 10 x 26 = $260.

Let’s take a look at what will happen with the second option.

 

W1

W2

W3

W4

W5

W6

W7

W8

W9

W10

$0.01

$0.02

$0.04

$0.08

$0.16

$0.32

$0.64

$1.28

$2.56

$5.12

W11

W12

W13

W14

W15

W16

$10.24

$20.48

$40.96

$81.92

$163.84

$327.68

 

Before we even get to finishing the entire 26 weeks we can see that in week 16 the pocket money received would be more than the total for the initial method!

If you put these results plus the constant $10/week on a graph in a spreadsheet the visual difference should be immediate and impressive. Your child should be left in no doubt that the second option is the way to go!!

Linear Exponential

Now it’s unlikely that you’ll actually offer this second option as a real plan to pay your kids their pocket money. But this can lead to talk about saving pocket money rather than spending it all and how the same principles apply in a generic savings account at the bank. Sure, in the above example we’re looking at a growth rate of 100%, when in reality a conservative growth rate at the time of writing this is more like 3.5%. But this little activity is a way to cement the idea firmly in your child’s mind that when compound interest is working in their favour it is a powerful tool.

As your kids reach their teenage years and thoughts of borrowing money for cars and travel start to enter their minds, it’s time to start talking to them about the unfortunate way that compound interest and exponential growth works against them when it comes to loans. But we’ll leave that discussion for another day!

This classic question comes from an ancient Chinese fable about an Emperor who unfortunately didn’t understand the power of exponential growth. Help your kids to grow up as intelligent, knowledgeable people!

Photo credit: Adrian Serghie / Foter / CC BY-NC-SA