Welcome to Human Asia’s Kidpreneurs Money Series – Lesson 4.
In this program, you will learn how to teach your kids the basics of finance to become kidpreneurs. Finance is the basic building block in entrepreneurship, but unfortunately finance is not being taught enough (or at all) at school.
These lessons, spread over many articles on this website, are meant to close that knowledge gap for your kids so that they can enter their careers later in life with a solid foundation of this very important knowledge.
These lessons can either be read by the kids themselves, or you can deliver it to them in the form of instructional teaching – whichever works best for you and your child!
However, make sure that you read from lesson to lesson without skipping as one lesson builds up to the next.
Without further ado, let’s begin Lesson 4 – The Power of Money!
A. Making Your Money Work for You
Your money can grow over time because of the interest it can earn when deposited in a bank. Interest is the money the bank pays you when you keep your money with them.
When you give your money to the banks, they don’t just sit on it. Instead, they use the money for their own banking business to earn more money than what they pay you in interest.
In other words, banks pay you interest because when you deposit your money, you are allowing them to use your money for their business.
To figure out the amount of interest, you need to know three numbers:
- The original amount of money, also known as the principal.
- The annual (yearly) interest rate. The interest rate is the rate paid for the use of money, and is shown as a percent.
- The length of time the money will be left in the bank. Also known as the term.
These three numbers are multiplied together to get the amount of interest earned. As an example, let’s say George deposited $1,000 of his savings to SaveMore Bank. This bank is paying three percent interest per year. How much interest will he receive in three years? Using the formula we just learned:
Interest = $1000 x 3% x 3 years
Interest = $90
George’s $1,000 will earn $90 in three years or $30 per year. The $90 earned in three years may not seem very exciting. But how much money will George earn in three years if he keeps his $1,000 savings under his bed? Zero!
That $90 of interest earned in three years is much better than nothing at all! Now think of how much interest George will earn if he increases the amount of money he deposits in the bank.
Add two zeroes to his initial deposit, making his total deposit $100,000. His interest for three years will be $9,000 (we just add two zeroes to the interest earned). This is equal to $3,000 per year! Amazing, right?
Lessons for Kidpreneurs from the Pro
” The key to managing money and building a nest egg is learning how to manage small amounts and grow them wisely over time. It can start with a pocket change and grow beyond anything you imagined. “
B. Money Works for Others, Too!
Just like most businesses, the banks operate to make profits. Because banks have money from the depositors, or the people who put money in the bank, the banks can lend that money to its own clients.
The banks make money by lending the money at a higher interest rate than what the bank pays you in interest. To show how banks make profits, assume that one of SaveMore Bank’s clients, Chloe, borrowed $1,000 to buy a new oven for her bakeshop.
In this scenario, Chloe became a borrower, while SaveMore Bank became a lender. SaveMore Bank used the money George deposited earlier, and lent it to Chloe. If SaveMore Bank charged seven percent interest to Chloe, how much will she pay if she used the borrowed money for three years? Using the same formula you learned earlier, you figure out the interest like this:
Interest = $1000 x 7% x 3 years
Interest = $210
At the end of the third year, Chloe will pay $210 to Save-More Bank. This $210 is revenue for the bank. So how much profit does the bank make from this simple transaction?
Go back and use the basic formula on how profit is made:
Profit = Revenue – Expenses
Profit = $210 interest from Chloe – $90 interest paid to George
Profit = $120
This is a simple illustration of how a bank makes money through the use of your deposits. Banks have many clients who put their money in the bank and many clients who borrow money from the bank.
For example, Bank of America listed in its website that in 2018, it had more than $1.1 trillion in deposits, and made a whopping $4.8 billion profit! The interest rates that banks offer to its depositors and borrowers are not fixed.
Rates can change over time because of different factors. For example, in the year 2000, some banks were paying interest rates of up to 5% to the people who put their money at the bank. The downside of this was that people who needed to borrow money had to pay higher interest rates. This was necessary so the banks could make money.
List of Important Words Learnt Today as Kidpreneurs:
Depositor : a person or an organisation that puts money in the bank.
Borrower: a person or an organisation that uses someone else’s money for a period of time
Lender : a person or an organisation that lends money in order to make a profit
Check out the ultimate startup business game for all ages!
Next Lesson : Kidpreneurs Money Lesson 5: Introduction to Credit
Want to see the whole Money Lesson Series? Click below.