Photo: Digital Vision/Thinkstock
As anyone who listens to my Oprah Radio show knows (maybe too well) my son recently had his bar mitzvah. He received some gifts in cash. Fortunately, his math teacher, Ms. Beck, timed her lesson on money math perfectly. It hit the week before his ceremony. All of a sudden, Jake wanted to know what sort of interest rate he was earning in his savings account, whether he could do better and if it was compounded daily. (I was impressed! He also told me that when he gets a credit card, he's going to pay it off every month, because—did you know, Mom?—that if you charge $500 and you only pay the minimum, you owe more than $500 the next month? A+, Ms. Beck.)
It's time to learn about interest
As my son learned, your money can work for you just by sitting in the bank or in an investment account. But at different rates. I took Ms. Beck's good work and sat him down at the computer where we surfed to Bankrate.com. On this website, which keeps an up-to-date list of the best savings rates in the country, I was able to show him that the 2 percent interest he was earning at the local bank was less than half the interest he could earn by putting his money with an Internet bank (for example, at that time, HSBC's online savings account yielded 5.05 percent APY. Check out the latest rates at www.hsbcdirect.com.). The trade-off: He wouldn't be able to walk into the branch to make a deposit, he'd have to do it by mail. Jake didn't mind. He wanted the money.
The rule of 72, by the way, is very intriguing to kids! It's an easy way to figure out how long an investment would take to double. If you divide 72 by the annual rate of return, you can roughly estimate how many years it will take to double. For example, if you wanted to figure out how long it would take $1 invested at 10 percent to double, just divide 72 by 10. The answer is 7.2, which is how many years it will take you to reach $2.
So are brain teasers like this one: Which would you rather have, a penny that doubles in value every day, or $1?