Alexis Ohanian and Serena Williams' daughter Olympia isn't yet one year old but, when she grows up, her dad is going to make sure she understands one crucial money concept: compound interest.
It's the single financial idea Ohanian wishes he could teach all young people, the Reddit co-founder told CNBC Make It on Tuesday at the launch of 1850 Brand Coffee's Bold Pioneer contest for aspiring entrepreneurs.
Compounding helps an amount grow at a faster rate. It's great for investments because, in addition to earning returns on your money, you also earn returns on those returns over time. Say you have a $10,000 investment that earns five percent interest the first year. The total investment is then worth $10,500. If it earns 5 percent the next year too, you'll have $11,025 after just two years — and you'll have made over $1,000 without doing anything.
In short, compounding causes your wealth to snowball over time and means that you don't have to save as much to reach your money goals. The sooner you make use of compounding interest, the more money you'll have in the end.
It's important to understand how compound interest can work against you too, Ohanian added: "I would want them to understand how debt works, because that's the not fun side of compounding interest."
If you have a loan with compound interest, the amount you owe regularly increases. In other words, the longer it takes you to pay off your loan, the more you end up having to pay. It's one of the reasons so many millennials are bogged down by repaying their student loans and so many Americans are struggling to pay off purchases they put on credit cards.
Ohanian also said it's important to teach your kids about "trade-offs and short-term versus long-term thinking," he told Make It, because, "if you can get good at delaying gratification, you can make smarter decisions with your finances."
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