Explaining personal finance to kids can be very challenging, especially when it comes to the logic around compounding.
Here’s a simple way to explain the power of compounding with your kids. Here’s how the conversation would be like between me and my imaginary son, Tom.
We’ve crossed the middle of the year again and if you’re as lucky as I am, you should have been informed of your salary increment for 2018.
This year, I got a small increment of $195 in my monthly payroll so that’s an additional 195 one-dollar soldiers awaiting for deployment every month!
I checked my salary allocation budget that I update every year and it looks like there’s no additional expenses incurred so far. That’s good news to me because all the 195 one-dollar soldiers will be deployed to investment wealth accumulation.
Saving money can sometimes be tough.
I mean, it often means doing something less convenient. Like cooking a meal at home instead of eating out, or waking up earlier taking the train instead of rushing out of your home and taking a taxi.
To make money saving activities more interesting, I decided to add a gamification component to reward myself. Because we all love to play games, don’t we?
Gamification is the application of typical elements of game playing (e.g. point scoring, competition with others, rules of play) to other areas of activity, typically as an online marketing technique to encourage engagement with a product or service.
The most popular case study that has been used to explain gamification is Dropbox’s rise to fame where they used gamification techniques to encourage its users to learn more about their product, use it and share with their friends. Dropbox currently has 500 million users around the world and a value of around $5-6 billion.
So how do we implement gamification with money saving activities?
If we break down gamification in its simplest form, there are only 2 components to this. Creating money saving challenges for yourself (and your family), and rewards for completing the challenges.
Simple enough? Let’s do this!
Let’s use public transport as a case study.
I pay a train fare of $1.16 to travel from my home to my workplace and incur the same cost going home after work. I give myself a money saving challenge to cycle to work instead of taking public transport. This could be challenging for some so you could also consider taking the train instead of taxi as a win too.
By cycling to work, I save some money in my transportation and food budget (because I would stop for a beer or snack along the way home occasionally).
Now that we have a challenge, let’s talk about rewards.
Cycling to work is a very simple challenge I’m setting for myself so I’m keeping the reward fairly basic.
For every time I cycle to work and back (that’s 2 activities), I will reward myself by transferring $2.32 ($1.16 multipled by 2) into my Discretionary Fund. My Discretionary Fund is a savings bucket that I use to spend on things that are not considered a necessity. Like that relaxing weekend vacation in Bali or the spanking new Apple iPhone.
Well, you get the point.
I also created a stretch reward for cycling to work more often. For every 10 cycle to work activities (that’s 1 work week of cycling to work), I will reward myself with an additional $10 in my Discretionary Fund.
Here’s how my little money saving gamification activity looks like
With some reward, I think this will definitely incentivise me to cycle to work more often. I’ll keep you updated in a few months’ time to see if this works out.
I’d love to hear your thoughts on this. Please share your thoughts in the comment section below.