When I was about 6 years old, my dad set out to teach me one of the most valuable lessons I've ever learned – the power of savings combined with compounding interest. Using a little paper ledger that came as part of a play money banking kit, he sat me down and drafted a contract between the two of us.
He would be my banker, and would pay me interest – 12% annually to make it simple. The interest would be paid as often as I cared to calculate it; monthly, weekly, or daily. A formula to calculate the interest was written permanently inside the cover of the book, and an example inscribed to ensure that I could see the multiplying effect of the money.
Now almost 30 years later, I abide by financial principles that are rooted in this lesson and responsible for my enduring financial security:
1) Seek yield, and reinvest when you find it.
2) Pay only the interest that is the lesser of the alternatives.
3) Maximize use of tax-exempt retirement saving options.
Finance is perceived as a complex topic, out the grasp of many. This is not true, and the perception is harmful. Simple tools that demonstrate the value of things like compounding interest could be tremendously helpful in creating broader financial literacy. In aggregate, these effects could help lift people out of debt, enable healthy retirement, and leave a legacy for generations to come.