Everyone once in a while– a while being the key phrase here–it will look like a lightbulb went on above my husband’s head. His eyes will open wide, and he’ll pull himself up to a full seated position on the sofa.

That’s the sign that a household project is going to start soon.

The last project was changing our lightbulbs from incandescent to the environmentally friendly compact fluorescent light bulbs (CFL). Every single one of them in the house, including the mood lighting I used to have in the sitting area in the living room, which has a dimmer. Except he bought non-dimming bulbs. They have dimmable compact fluorescent bulbs, but he was too cheap to buy them. Or forgot, and was too lazy to go back to get them.

Before I waste too much space on the argument over the dimmer, let’s just say that his idea to change all the lightbulbs was the first time he has ever sparked a money lesson in a positive way.

It is very difficult to teach teens cost effectiveness, and why cheapest isn’t always really cheapest. Teens live in the moment, and long term implications are simply hard for them to see as tangible. Yet it’s one of the most important money lessons: How much does something cost in the long run when it is an item with a long shelf life?

If they can get their minds around the cost effective concept they will be much better managers of money. And new age lightbulbs–those coiled ones–are a perfect opportunity, if you’re willing to have your house go green. The cost out of the box for CFLs are higher than regular old lightbulbs. So teens have to do the math to get to the cost effectiveness.

It’s a project teens can handle. Have them go through the house and count how many bulbs there are. Then have them comparison shop the best prices for the number of CFLs you’ll need to overhaul your home. Have them compare costs for online offers versus your local hardware store.

The basic equation they need to understand: A CFL uses 75% less energy and lasts about 10 times longer than an incandescent bulb. So even if it takes 6 months to pay for itself (the average), it’s still worth it because the CFL lifespan is so much longer than 6 months. Point out that they’d have to keep buying incandescent bulbs, which don’t even last 6 months. CFLs can last years.

For a fun math challenge, ask your teen–once they have priced the CFLs and regular bulbs–if they can figure out how much money a CFL saves over its lifetime if its lifetime is a) 1 year; b) 2 years; C) 3 years, etc. etc.

Now, that challenge will be based on only one factor: that the fact that the CFL bulb pays for itself in six months.That return on investment timing may vary, depending on the prices your teen finds. It may be that it pays for itself in 5 months, or 7 months. In any case, that’s a one variable challenge.

Here’s the more advanced challenge: If a CFL bulb uses 75% less energy AND it lasts, say, 4 years, then how much money do you save over its life? They’ll have to calculate energy cost savings for the CFL versus the incandescent over 4 years, then add it to the mere lifespan savings.

Good luck, and make sure they purchase at least a few dimmable ones!
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My favorite thing (and I know this makes me just about the dullest person around): A money lesson with double bang for the buck.

So I was sitting here trying to explain to three teenagers why it’s important to reinvest money in your future — my newest euphemism for “Don’t spend your entire allowance and babysitting money. Put some in savings.”

Not happening. I got trumped by Jonas Brothers tickets. I never stood a chance.

And then one of the teens’ mothers came by. She works for an environmental non-profit. This woman does so many deeds that benefit society, just standing near her makes me want to run out and build affordable housing–or at least get my husband off the sofa to go rake the elderly neighbor’s yard.

The point is she was telling me the challenges of getting her grant money actually paid; they’re always late. But she still needs to pay her team on time. But they recognize the value of what she does, and the way she is growing the programs. Every year she grows the program, these grantors give her more money.

Bingo, the allowance saving lesson was born.

The great thing about a non-profit is it’s all about reinvesting money in the future of the organization. It’s about making the organization function well and grow, because additional money is usually infused only if the organization proves its merit. And the real differentiator between a non-profit and profit-based company: The money earned by the organization goes to pay salaries, fund programs, and pay all other overhead. There is no profit taken.

What exactly is profit? It’s the money left over after the overhead is paid. What is overhead? Every cost the company is liable for; all the expenses. Profit goes to the owners in a privately owned company, either as their only income, or as extra money, if they take a salary as well. In a public company, it goes to the owners in a manner of speaking as well. It goes to major shareholders, and Board of Directors members.

Profit can be a good thing, but it also causes problems. Sometimes corporations focus only on profit–which makes the maximum money for the executives, who are the major shareholders and Board members. Sometimes they want profit above all else, and the quality of what the company produces suffers as a result. Sometimes they produce a cheaper product, or decide to fire some employees so the profit is bigger. Companies can end up failing because they focus so much on profit at the outset that they don’t invest in creating a quality company.

(Disclaimer here: That’s of course not always the case, or even mostly the case. But it’s a danger, especially for newer companies.)

Tell your teen that they are like a brand new company just starting out. Bear with me here. If a brand new company is all about profit and doesn’t reinvest in the company, then it won’t have the means to produce quality goods and services and grow. A company that doesn’t grow folds.

A teen should be like a non-profit. Their financial lives are just starting out. If they take everything as profit–spending money– then they’re not investing in themselves for their growth. Growth goals for a teen: They need a car and insurance ones of these days, right? College money? Rent money for a cool apartment? Or bring it down a notch: Money for that ski trip that will enhance their spirit. These are things that help the teen grow.

Give it a try. I’m curious how your teens react. They tend to be socially conscientious, so the idea of functioning for quality rather than greed should appeal to them.

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The mere phrase car loan can make people uncomfortable. There’s something about the whole process–maybe that you get these loans through a salesperson you didn’t trust from the outset, instead of from a banker. And there’s definitely some conflict of interest inherent there. You wouldn’t get your mortgage through a real estate agent.

Mortgages. Real estate. Bankers. So maybe in this post-subprime economy (that’s my new little moniker to rival post-modern), car salespeople don’t look so bad in comparison.

In any case, unless you or your kids have the cash to lay out for a car, your kids are looking at car loans. And there are good reasons for kids to have cars.

Let’s get my neurotic reason out of the way first: You can train your own kid to be responsible, which is better than them riding around with kids you have less control over.

My students without cars often tell me that they could find part time jobs a lot easier if they had a car. They could expand their search beyond campus, actually apply for interesting work. It’s true. There was a great internship at PBS television I had arranged for one of my students, but ultimately she couldn’t get there and back three times a week. And it was the sort of internship that both looks great on a resume and could easily lead to full time employment.

Finally, car loans are a great way for kids to understand and establish credit.

Here are the most important things to know about getting teens and college kids car loans.
1. Unless they have some great job, you are going to have to cosign.
2. Make sure the downpayment is 20% and the life of the loan is 48 months or less, or you run the risk of paying more to own the car than it cost to begin with. This is a great lesson for kids–true price of ownership. When teens first venture into the world of loans, even if it’s just by using credit cards, they don’t really grasp how much they’re paying for the money they’re borrowing. Unlike with credit card debt, a car loan can teach them about the value of borrowed money, and when too much is too much.

By making the loan for 2 years or less, you also really show them how expensive it is to afford a car. They may just be more careful drivers because of it. If they’re already paying–and no matter what, I do suggest that your kids at least contribute to their car payments–then they won’t want to run the risk of incurring more debt.

Give them real world, frightening examples. I’m serious. I’m a big believer in scaring kids when it comes to driving. I like to tell kids if they text in a car–and I yell at any kid I see doing this–the likelihood of them getting into a very serious accident just went up at least 100 percent.

Then tell them how much it cost the last time any little thing went wrong with your own car. The point is that car repair is expensive. You smash something, never mind that you’ll get hurt. You can hit $1,000, or a lot more, for repairing something that barely looks out of whack. It’s hundreds of dollars for a tail light.

3. Even if you are paying for the loan, have your teen be the one who takes the coupon book and physically makes the payments every month. Make sure they’re really in charge of remembering, and paying online or by check. Set up an account for them to do this. It’s important that they feel the habit of a loan. Just inputting that number, that significant cost, into the computer, or onto a check, will make them understand credit.

4. Here’s a way to avoid you being the worrying nag, and your teen getting resentful: Tell them that as long as you’re the silent partner (unless they want you to be the not so silent partner), they have an obligation to inform you when payment has been made. So each month, after they make their car payment, they need to send you an email confirming that they made it. That way, your nagging is reactive, not proactive, and they have only themselves to blame.

Good luck. The best part about this approach is that unlike with a mortgage, they will live to see the day that they pay this loan off. Very gratifying. And once they really own the car, they’ll continue to be more careful if they were instrumental in getting the thing paid off. Another great lesson that will truly sink in: You don’t really own something if there’s still an outstanding loan on it.

Make sure to map this concept for them to the very mundane, day to day. If your daughter spends $300 on a purse, which she puts on a credit card, she doesn’t really own that purse until she pays it off. It’s hard to enforce this latter concept, because if you screw up credit they simply take it away; they don’t seize the items you have in your possession but never actually paid for. But, hey, give the concept a shot anyway, even if your smarty pants teen pokes holes in it.

Good luck!
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The discussion of whether to own your own business or be a an employee is a longstanding one, and recession certain heats up that discussion.

A reader sparked this idea today, actually, when she wrote in to ask what I thought about teaching her teen the advantages of building a business, so the kid doesn’t end up being a powerless employee in a volatile workforce marketplace.

Now, tell your teen that the reason this is such a recession topic is that today being an employee is risky business, arguably riskier than owning your own business (depending of course how recession proof that business is). You can hear in the reader’s tone–and thank you, reader, for writing in with such a great topic!–that being a captive employee has left her at an employer’s mercy during uncertain times. She feels stuck, with limited choices, and wants her child to have more choices, more independence.

It’s interesting because in good economic times, many small business owners I know ponder the long hours they’re working, and whether it would be easier to work for someone else, have someone else do the worrying and pay the bills. But now, if your small business is doing well–and recession can often be a growth time for small business, which we’ll get to in a minute–the owners seemed relieved by their positions, because all the maneuvering that has to be done, such as cost cutting, change of business mission, and diversification, are all in their control.

Control over your work life is a great lesson to teach teens. And teaching them how to build their own business can mean they’ll have some recession skills, a backup plan, if not a primary career path. That was really the crux of what our reader was asking.

I say, without hesitation, yes! The worst that can happen is they’ll earn extra money along the way, manage their personal finances better, build workplace confidence, and gain management experience for any job they take.

The most important lesson, perhaps, is that it is wise to create as many choices in your life as possible. And guess what, maybe even the parent reader can still create more choices. Sometimes teaching a teen to build a business sparks an idea for parents. It would be a lot of work for someone who already has a job, but some side businesses can grow into front and center revenue and therefore full time self-employment.

A prominent medical research scientist I know, who is in his 70s, told me once that he has a recession skill, if grants dry up: He’s a brick layer. His father taught him that skill when he was 12 in case he ever needed to start up his own business to pay the bills.

And therein lies the method of teaching kids a very introductory course in building a business.

1. Choose a skill to master. The mortgage crisis and downturn in home building, and construction altogether, has taught us that perhaps skills like brick laying aren’t the best recession skills in modern times.

But repair skills are. Things break that people need, recession or no recession, and people have to fix them. Also, people tend to repair more, because they’re spending less on new things.

If you have a teen with an aptitude for repairing electronics or computers, consider sending that teen to a class or two to really brush up the skills. Let them start a side job, maybe advertise in their school newspaper or on fliers in the local grocery store. Computer repair is an excellent recession skill.

In general, think of things that always break and the fix-it skill will prove to be valuable–especially when replacement cost for that item is high. So plumbing and electrical are other examples. And they tend to be things that require a license of some kind. Can’t hurt to get a license.

But if a teen wants to start now, take a skill they have–lawn care, babysitting, tutoring– and teach them about competitive pricing. Price a bit lower than other people, advertise, and you’ll see you can draw customers. Great lesson.

2. If you have a college-bound teen, encourage them to study professions that can apply to different fields and foster independence: law is one, accounting is another. Both  those skills, for instance, are key for entrepreneurs, and many pay dearly for those services. Two of the most successful business owners I know are degreed lawyers who no longer practice law. But they do have law now as their backup,and they don’t pay lawyers for contracts they need drafted for their business, or forms they need to file with the government.

3.  Point your teen toward the Wharton Business School Small Business Development Center website. Also their online newsletter called Get It Started. This is such a great website, I love recommending it. Don’t be daunted by it. Let your teen read it, read it yourself, there’s so much great stuff in there. The Gap business plan came out of Wharton, among many other things. Just keep reading until you get used to the language. It’s not over their heads.

Do send in any stores if your teen has started a business!

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This time of year is even scarier than the beginning of December in terms of me being an ATM. Maybe because kids can blindside you now, and by December you’re ready for them.

So innocently, my daughter said to me yesterday: We’re going to see her cousins on Thanksgiving, the first holiday of winter, as she calls it, and she knows just what gift to get them. But we should order it online now before they run out.

I was sitting at the computer entering my credit card number on the latest greatest kid electronics before I realized that we were also going to see the cousins-aunts-uncles over Christmas.

Wait just a minute. We¹re going to do Christmas/Hanukah/Kwaanza/Winter Solstice/Whatever shopping at Thanksgiving and then again in December?

How did that happen? But once she was done with her rebuttal, which seriously rivaled Jimmy Stewart¹s court speech in Mr. Smith Goes to Washington, I realized that she was right, that our society has demanded double gifts, and did so nice and slowly so I didn¹t notice I was being had.

Here’s her argument: You can’t go to someone’s house and stay the long weekend and not bring cute gifts. And you know darn well when we go back to the cousins at Christmas, we’re not going empty handed.

She had me. And I’m a pragmatist. Looking at her folded arms, her smug look of victory, her iron clad logic in pink fuzzy leg warmers as she pointed back to the computer screen, I knew this was my new reality. My next challenge was to find a way to bring it within some semblance of control–after I ordered the pink electronics, of course.

So here’s the deal: I love budgets and revenge. I called my sister, knowing full well that if my little lawyer was selling me on cousin gifts, the cousins were doing the same thing. And if I was going to impose serious restrictions on my daughter, it was important that it be the same on the other end, so they weren¹t being extravagant while we were being controlled. Nothing worse than looking like the family tightwad at a holiday gathering.

That said, if you can only get your immediate family to buy in, do it anyway.

We came up with this plan:

Have your teen make a Gift Chart that includes every kid in the extended family that you’re going to see between now and New Year’s. If you¹re not going to see them, but there are other family members, they get a homemade card and a homemade food gift.

Next, put on the chart how many times you’re going to see each kid. e.g. We’re going to see cousin Olivia at Christmas but not at Thanksgiving. So she will be budgeted for one gift. We’re going to see cousin Christopher at both, so he’s budgeted for two.

Tell your teen that this year you’re doing three categories of gifts: purchased ones, handmade ones, and handmade food ones. The food ones are automatic for anyone you¹re not actually seeing, and they are one of two gifts for anyone your family is going to see twice. Food is also going to be made for stocking stuffers.

Tell your teen they can choose two people to buy gifts for, and the rest will be homemade gifts. For the purchased gifts: Have your teen go online and price what he or she considers a good Christmas gift. This can be a category, such as: kid iPod.

Have them search on an item, and then look for the best deals–may as well add the comparison shopping challenge in there. Once you find the best price, that¹s the budget. And that is it. You put the cost ceiling for each kid that is getting a purchased gift. If you have a more than one kid, it is likely that the purchased gift would be for a sibling. (Another idea to bypass even this is to get one family gift for your entire household, like a DVD player.)

Once the budget is set for the purchased, it is immovable, even if your kid decides they want to get their sibling a Wii game or a karaoke machine instead of a kid iPod (which runs $20 - $40). The reason for this is key: This is how teens get you. They rely on being fickle. As the advertisers, who are smart, don¹t forget, when they up the ante for expensive gifts, your kids are first in line to buy in.

5. An addendum rule: My daughter can spend a fortune in the “wrapping paper” category: keychains for backpacks with cute stuffed animals on them, singing cards, pocket lip gloss—all the impulse purchase stuff at the checkout counter. Have kids make these novelty items with some pom-poms, googley eyes and glue, and some clip ons you get at the crafts store.

The crafts store. Now we¹re getting to the heart and soul of this Christmas and Thanksgiving and whatever else shopping season. Craft stores are amazing fun, and kids can come up with great ideas. Honestly, they¹ll remember how much they love making things.

You make two trips. The first one is for ideas: Bring the gift chart and have the kids decide what they want to make for each person. Then go back home and see what materials you already have. You may be surprised. For instance, if you¹re making handmade stuffed animals or dolls for younger kids, old clothing can be used for the material, yarn for hair or a horse¹s or lion’s mane, old pillows for stuffing.

And you know what makes beautiful wrapping paper? Brown paper grocery bags that are painted.

After you’ve exhausted what you can make with available materials, if you still have people on your list, make a list of ideas and the materials you still need.

Then go back to the craft store, or the hardware store, or the dollar store.

In fact, comparison shop all of these for the materials you need. Include online outlets for discount craft supplies.

Keep track of everything you spend this year, if you do decide to go the homemade route. And take stock: If you have a way to compare to last year’s spending, show the kids. They¹ll be amazed. And I¹d be surprised if they don’t like what they produce far better than what they¹ve bought in the past.

I’d love to hear about craft ideas as well. And not just for the holidays: Birthdays, anniversaries, baby showers…

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One thing I notice many adults are terrible about is rewarding themselves appropriately, in a manner that motivates them to do well. It’s strange, if you think about it. Many of us have terrible habits: If we do well at work, we’ll shop for something we can’t really afford, or binge on junk food or alcohol, or worse, not reward ourselves at all.

In some cases, we don’t think we deserve a reward until we’ve done way too much–workaholism is rampant in our culture.

I started wondering when we developed such unbalanced habits.Probably like many habits, when we were kids. Now, I know what some of you are thinking: The last thing my teen needs is more reward.

But just bear with me for a moment because I think this logic tracks: If teens are too easy to reward themselves, then they don’t understand the concept of reward anyway, so the pendulum could swing the other way later–where they themselves feel overindulged as adults, and they have regrets about not achieving more, so then they apply pressure and never reward themselves.

The idea is to give reward an infrastructure, so it stands on its own, and excesses in either direction–too much reward, or too little reward–are eliminated, balance is achieved.

So here’s a plan for teen’s self reward system for good grades. And now is a time to execute it because there’s enough time left in the semester to turn over a new leaf if need be. Tell your teen this is an experiment from now until end of semester. If they agree to execute this plan, they’ll get double allowance for the month of January.

(Now, that is not paying for grades because it is not direct. You are giving them a bonus for a new system of good working and living habits.)

Wipe the slate clean of all present rewards, even ones that don’t have anything directly to do with grades. So, say your teen is allowed to watch TV right after doing homework. Tell them that’s no longer a given for the rest of the semester. You’re not necessarily taking it away, but this exercise in creating a reward chart is about clean slate thinking, having an open mind and redoing everything.

Have your teen make a list of privileges they want, little ones and big ones. A little one could be watching TV after homework is finished. A big one could be going out on a school night.

Next have your teen make a chart of all papers, tests, quizzes, reports, homework they have due for the rest of the semester in each subject. I’ll bet their teachers would be happy to help them with such a calendar chart if they don’t have all the information. So the chart should have the subjects listed in the vertical column, and the graded assignments, tests and each item’s due date running horizontally.

Have them assign a reward they think is appropriate for a good grade on each of these items. (You can choose how to decide what a good grade is, given your teen’s individual strengths and weaknesses.)

Reserve veto power in case you think they’re a little loose with the rewards–like being able to go to a rock concert just for handing in homework on time.

Next have them, under the chart, or on another sheet of paper or screen, map out the time they will need to devote to each assignment/subject to get their goal grades. Then have them fill out a time chart. They can use a blank weekly calendar. Have them write down when they’ll work on what, and for how long.

Have them check each week to see if their time plan is working, or if it needs tweaking–e.g., more time in math is necessary to meet the grade goal, but not so much time in reading, they’re finishing early every day. These adjustments are key because they’re a little reward system of their own, and empowering. It also teaches time management–I could use a little lesson in that, honestly. Time management is one of the most important budgeting lessons anyone learns.

At the end of the semester, see how they do, and how they feel what they did. If their grades improved, their academic stress was alleviated, and they really enjoy their privileges with new awareness–not to mention their bonus — I’d keep the system going until it’s truly habitual. Hey, they may always want to make a chart to plan their time.

When you see someone settle in for their favorite TV show, knowing nothing is hanging over their head, and they can really relax, it’s a very liberating feeling. Of course the same goes for bigger rewards, like that rock concert for an A on a final exam, but maybe they’ll be surprised that the day to day kindness to themselves, and stress relief, is the greatest gift of all.

And best of all it builds the habit of balance, which in turn enables good quality of life as an adult. Hmm. Maybe I should take my own advice.

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My father’s voice is in my head this week, probably because my birthday is just days away.

My last post was on teaching teens about calculating simple and compound interest–one of the money lessons I learned from him. So this morning when the alarm went off, that fast-becoming-annoying voice in my head said: What about stock dividends? Did you forget? Get up and teach them about dividends. How can you just leave them hanging with interest rates?

If you didn’t grow up with a mathematician for a parent, let me assure you that my childhood was every bit as weird as you’re thinking it was.

When my father first taught me what a stock was, he made sure to tell me he loved to invest in companies that paid dividends.

Here’s what a dividend is: It’s a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. It can be paid in dollar amounts, or in the form of additional shares of stock. Conceptually, it’s essentially the interest you earn for being a part owner–shareholder–of the company, for trusting them enough to invest in them.

Not all public companies offer dividends. Some simply offer a capital gain (hey, Dad, I didn’t forget capital gain in the dividend lesson!), which is what that stock ticker price is all about. When you see that, say, IBM is at $120 today, that means that’s the street price for one share of its stock. The capital gain is how much you make when you sell the stock. So, if you bought IBM at $80, your capital gain would be $40 if you sold it when it was worth $120.

Capital loss is when you buy IBM at $120 and sell it for $80. Tell your kids that, in a nutshell, too many capital losses is what most adults have been moaning about for the last year.

Why do some companies pay dividends and some don’t? Mature, low risk companies pay dividends. It’s their way of telling shareholders they’re solvent and safe. Newer, high-growth companies generally do not.

Discussion Question for you and your teen
That doesn’t really explain why Apple, for instance, doesn’t pay dividends. Yes, it’s a high-growth company, but it’s also stable enough to pay dividends, and in fact it used to. This begs a good discussion question with your teens, once they understand the concept of a dividend:

Does Apple now refuse to pay dividends because they’re cheap, or because the company philosophy is to reinvest earnings in the company for maximum innovation? What happened in the marketplace to make them feel pressure to start reinvesting all of their earnings? Did it have anything to do with Microsoft?

My father invested 80% of his investment money in dividend paying companies, and only 20% in non-dividend paying stocks. That tells you something about our parents’ generation. Today, most people have the opposite ratio.

He invested 20% in non-dividend companies because he believed in innovators, and companies struggling to grow. And as an entrepreneur himself, he knew how important it is to put all the company earnings back into the company while it’s growing.

And that’s essentially the difference between a dividend paying and non-dividend paying company: newness, growth, how much capital they need to continue to grow given their competition. It is correct to assume that non-dividend paying companies are a riskier investment than dividend paying ones.

Another Discussion Question
Ask your teens which they think they’d prefer: Investing in a dividend-paying or non-dividend paying stock? Show them some examples. Hint: for dividend-payers, look at blue-chip stocks. I’d love to hear their opinions.

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I’m starting to sound like my father, even when I talk to myself. I find that scarier than sounding like my mother. Well, in some ways.

Here is what I literally caught myself muttering this morning as I prepared to teach my class: “Kids today, they can’t calculate anything. They have gadgets to do all their thinking so they don’t understand anything.”

If this were a movie, that’s where they’d do a freeze-frame closeup on my horrified face. Kids today? Did I really just say that?

The lesson I was planning was about understanding interest rates, what affects them, and how the media handles coverage of them. I began the grouchy muttering as I packed my laptop and looked for my keys. I knew it would take the entire class period just to give them a primer on what an interest rate is, and we’d never get to the political and economic influences, or media focus.

Teens should not reach college without knowing how to calculate interest, both simple interest and compounded interest.

My father wouldn’t let me out of 8th grade without knowing how to calculate interest. And he did not mean knowing how to push buttons on my Texas Instruments calculator. He’d be doubly appalled that kids could bypass comprehension entirely now by Googling “interest rate calculators.” At least I had to know what to multiply by on my calculator.

I am now a believer, a disciple of my father’s dogma, that two things should be outlawed at any educational institution: chewing gum and calculators.

“The privilege to use a calculator should be granted only when the person has demonstrated mastery of what he or she is calculating. A calculator is a gift of speed for those masters. It is not a portable appendage to your brain.”

“But Dad, they let us use a calculator in school.” That’s me, age 14.

“Well then, we’ll change their mind or we’ll change schools.”

Enough of me reliving my very quotable childhood with my father.

How To Calculate Simple Interest

First, a definition of simple interest: The amount paid for the use of someone else’s money. So, if you borrow money, it’s the amount you pay on the loan. If you invest money, it’s the amount you earn for investing the money. It is expressed as a percentage. Example: A 5% interest rate means that you will earn $5 for keeping $100 in a savings account for a year.

Here is the formula for simple interest:
M = P + (P x i)

M is the final amount including the principal.
P is the principal amount.
i is the rate of interest per year

How To Calculate Compounded Interest

First, the definition: Compound interest is the amount you earn not only on the original principal, but also on the interest earned earlier and left in the account. So, in the above example, after year one, there is $105 in the account, and so future interest will be calculated with P = $105 instead of $100.

Interest can be compound daily, monthly, or yearly. Daily is complex because sometimes you’re talking about including a fraction of earned interest into the principal and then calculating for the next day.

Here is the formula for calculating all compound interest.

M = P( 1 + i )n
M is the final amount including the principal.
P is the principal amount.
i is the rate of interest per year, or per day, or per month, depending what compound interest rate answer you want.
n is the number of years, or days, or months invested, depending on what compounded interest rate you’re applying.

Here’s the above example with compounded yearly interest for 3 years. Same 5% interest rate.
M = 100 (1 + 0.05)3 = $115.76.

Once your teens memorize and understand these formulas, and how to calculate interest, play a game. Show them these calculators. Let them look at each one that’s pertinent to interest (all are except the allowance calculators). There’s a savings calculator, mortgage calculator. Once they can demonstrate an understanding of how each calculator works, by writing down what the equation is that the calculator uses (and use the variables above), then let them play out savings and mortgage scenarios.

And if your teen is up for it: The Calculator Challenge

When they’re finished, see if your teens can think of a new calculator to invent. If they do, and you send it in to me, with the explanation of how it was derived and the formula or it, I’ll have the calculator made and put it up on the blog. Your teen can name it–e.g. Maria’s Can You Afford This Item Calculator–and will get full credit on the blog.

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