5 simple ways to teach kids about investing

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A few years ago, T. Rowe Price conducted a Parents, Kids & Money Survey with some unsettling results. For example, just over half of parents surveyed have talked to their children (ages 8-14) about investing. Yet 44% of parents haven’t discussed or taught any of those investment topics with their kids.

 

One of the biggest mistakes parents make today when trying to instill financial literacy into their children is trying to run before their kids can crawl. Teaching your kids to invest in individual stocks before they have a basic foundation of some core financial principles is like trying to teach a youth basketball player to dunk before you teach them how to dribble the ball. Dunking is cool, but there is no dunking until they can dribble the ball to the basket to make that dunk.

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What other financial topics are there that should be in line ahead of investing? It is debatable, but one would have to consider issues such as receiving an allowance, the miracle of compound interest and inflation. There are probably a few more, but those are examples of items you’ll want to make sure your child has a grasp on before you venture down the road of creating the next Warren Buffett.

Steps to Teaching Kids to Invest

Parents often get excited and want to jump right to teaching kids to invest and buy stocks. But in my opinion, that is not the place to start. Now you would be entirely correct if you said if they opened the door and showed an interest, you’d want to capitalize on teaching them about money, meaning skip the other things you should teach them first and jump into what interests them today – AKA the shiny penny syndrome.

 

But if you take a step back and think about it, will most young adults grow their investment skillset and have the time/energy to apply these skills properly in addition to their day job? The answer is likely no. It would mean they’d have to get their financial investment understanding to the level that they will manage their portfolio during the day alongside their real job. Not only that, but they’d need to manage their asset classes (and geographic regions), a diversified portfolio, and remember, we’re talking about high-quality, individual stocks and/or bonds (not diversified ETFs or mutual funds). It is doubtful they would be able to take this effort on and perform well.

 

Learning about individual stocks is the sizzle but not a core foundational piece that the beginning investor should spend a lot of time on. I’d implore you to keep it simple out of the gates until such time they can start managing their portfolio from an individual stock perspective.

 

When it comes to teaching your kids about investing, here are the steps that make sense to follow.

 

Step 1: Know Your Time Horizon

It’s going to go right into a conversation of risk and reward. Understanding the time horizon might be the most significant factor in determining how you will ultimately structure your portfolio.

 

I want you to think about this in terms of your child’s 529 college savings plan (if you have one). Most of you get advised to choose the “aged-based plan.” What we have here is a portfolio that: over 18 years if you start the day they come out. It starts aggressive and gradually becomes less aggressive as your child gets closer to college. Why? Because the less time between today and when that first check to university needs to get cut, the less time you’ll have to let your portfolio recoup should the market have a pullback (1987, 2000-02, 2008 and 2020, to name a few).

 

When your child is born, he has an 18 year time horizon until that first check needs to get cut. But when that child turns 15, a three-year time horizon doesn’t quite cut it should the markets pull back in a bad way, thus making you liquidate those funds at a low, the worst time to take money out of your equity portfolio.

Time Horizon Examples

Here are examples of three scenarios to let your child tell you how much risk they should take in their investment portfolio based on their time horizon:

  1. You have $18,000 that you need to use for college next year.
  2. You won $20,000 from a scratch-off card, and you won’t need the money for quite some time.
  3. You received $1,000 in gift money in 7th grade. You plan on using this money to buy your first car in 12th grade.

Make sure you know how long it will be until you need to use this money to guide the next step.

 

Read more: 19 ways to use your tax refund to build wealth

Step 2: Understand Risk versus Reward

By now, most parents have learned the phrase: Low risk, low return – High risk, high return.

 

But it’s hard for a young adult to understand what that means. They get a general concept, but they have no clue which investment vehicles help you manage that risk. It’s is typically an excellent time to get a top-down understanding of the many investment products that one will use, in a diversified fashion, to meet their future savings goals.

Refer to the Investment Products Pyramid

My favorite visual for teaching risk versus reward of investment products in this pyramid:

 

Investment risk pyramid

The visual above shows the risks/rewards of different types of investments. You can see that investments with lower risks and lower returns are at the bottom. It’s what we would refer to as stable asset classes. Investments that would fall into this foundational level of the investment pyramid include cash, CDs and money market accounts.

 

At the top of the chart, you see stocks. And while stocks historically give us healthy returns over the long run, that comes with a tremendous amount of volatility and risk during the short run. If you take a step back and think about it, investors need volatility and risk to get a higher return. While there is no guarantee that high risk equals high returns, making educated allocations with some of these asset classes is usually necessary to help your money not lose purchasing power and keep up with inflation.

 

Related read: Tax preparation services near me

Step 3: Establish Your Diversification

It has been said that the single biggest determinant of investor returns comes from asset allocation, otherwise known as diversification. Try this chart from Fidelity on for size:

Investment portfolio risk chart

The chart implies a corresponding asset allocation of diversified assets for every level of risk that would align with risk tolerance. It’s an art and not a science. As you have heard legal disclaimers say, “Past performance is not an indication of future results.” That is true, but it’s still what the financial planning and asset management community use to base their portfolio’s diversification. Choosing a mix of stocks, bonds, alternative asset classes and cash are the major buckets one uses to help construct these portfolios.

 

The longer time horizon investors have to ride out the ups and downs of the market’s volatility, the more comfortable they can move to the right on the risk scale provided this essential point: Investors should only take on a risk level to the extent that they won’t get overly emotional when the market goes down (and it will), causing them to take action on abandoning the plan. Diversification only works when investors stay the course in both up and down markets.

What if my time horizon is short?

If your time horizon is just a couple of years, then do yourself a favor and don’t venture too far out on the risk scale. It’s better to keep those shorter-term dollars in more stable asset classes so that the money will be there in its entirety when you intend to use it and don’t need to stay in it “until the market comes back.”

 

One key lesson is that trying to predict returns for various investments is a losing strategy. You can lump into that futility trying to guess how asset classes will perform relative to one another in the short run too.

Step 4: Choose Your Investments

These days, a never-ending list of choices exists in the financial marketplace. And picking stocks, bonds, mutual funds, ETFs or money managers to execute each part of your well-diversified portfolio is not easy to do.

 

My preference is to stick with index funds, as they give broader diversification than just one individual stock. Also, they are low in fees and serve as a great starter kit for kids to understand to fill in their “buckets of diversification.” However, it’s a much longer discussion and probably could be a subject to which we dedicate an entire article.

Step 5: Maintain Your Course

This is not an exercise of setting a portfolio and then forgetting about it. There is a balance between looking at your portfolio too much versus not enough. Just because you set an asset allocation doesn’t mean you never tweak it. It’s important to monitor things from time to time and rebalance every so often. For young kids, I think you make this point and then rebalance twice per year. That way, they make it a habit, and later on, when they are no longer in your home and are in their real life, they can determine the frequency of the monitoring and rebalancing. By the time they get there, computers will have taken over this entire process and monitor and rebalance for them.

 

Here is an excellent chart for you to use, called the Periodic Table of Investment Returns to talk about what’s happened historically in the markets, the importance of maintaining the course and to get them thinking about rebalancing based on what’s happened within the last year in certain asset classes.

Resources to Use When Teaching Kids to Invest

There are so many players in the “teach your kids to invest” world that it would be impossible to cover it all. Instead, let me share a few investment platform solutions that have passed my desk over the years without giving you an opinion about how I feel about them.

Platforms to invest real money:

  • BusyKid
  • Robinhood
  • Betterment
  • Stockpile
  • Beanstock
  • Cash App
  • FinTron
  • Learn & Earn
  • M1 Finance
  • Schwab Stock Slices
  • Public Investing
  • SoFi Invest

Other options:

  • Virtual stock picking: Stock Market Game
  • Single share purchase (just a framed copy of a single share of stock)
  • Books: The Little Red Hen – The gist of this fable: The hen invested the time and effort to turn wheat into bread- sowing the grain, harvesting it, and making dough. It suggests using long-term thinking of investing time/energy.

Final Thoughts

You are just looking for little coachable moments as a parent. Those are opportunities that pop up in the flow of ordinary life, enabling you to teach investing to your child in a natural way to what’s going on around them. That could mean showing them an account statement when it arrives in the mail and teaching them about asset allocation. Or it could be asking at the dinner table, “Did you happen to see what happened in the stock market today?” And when the iron is hot and they show some interest, try to dive deeper into the information above. What happens if they don’t show any interest? Please find a way to get it on topic anyway. While they might not appreciate it now, they certainly will later. And that’s for sure!

 

Related:

This article originally appeared on The Financially Independent Millennial and was syndicated by MediaFeed.org.

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Pablo Escobar lost $1B to rats, plus other fascinating money facts

 

Love money? You’re not alone. But what do you really know about money?

We’ve rounded up dozens of facts covering currencies from all over the world, including historical and weird facts you probably don’t know.

Here are 100 fascinating money facts for you to enjoy.

 

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The study of money is called numismatics.

 

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The first Philadelphia Mint used horses in harness to drive the machinery that produced coins.

 

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The first paper money was made in China 1,000 years ago.

 

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The first coins were made about 2,500 years ago.

 

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Queen Elizabeth II has appeared on more currency than any other person.

 

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There are over 170 different currencies in use around the world.

 

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There is more Monopoly money printed every year than actual money.

 

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Only 8% of currency is in physical form.

 

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Money is estimated to be dirtier than a toilet.

 

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Pennies planted in the garden will repel slugs.

 

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The TSA collected $765,759.15 in loose change at airport security checkpoints in 2015.

 

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The average allowance is $65 a month.

 

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Piggy banks originated from the “pygg,” a clay used for making jars that held money.

 

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In fact, there is an ATM in Antarctica.

 

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Over half of lottery tickets are bought by 5% of people.

 

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Drug Lord Pablo Escobar had so much money laying around that rats ate approximately $1 billion.

 

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Putting bills in the microwave for about 20 seconds will make them crispy again.

 

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The largest denomination ever printed was in Hungary in 1946, worth 100 quintillion pengoes.

 

Magyar Nemzeti Bank (Hungarian National Bank) / WikiMedia Commons

 

The word “salary” comes from sal, meaning “salt” in Latin. Early Romans used salt as money.

 

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The world’s worst inflation is in Zimbabwe. There was a 6.5 sextillion percent inflation rate in 2008.

 

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The word “cash” originated in ancient China, where a bundle of 100 coins was called one cash.

 

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The word “cent” is derived from the Latin centum, meaning “hundred.”

 

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The term “cash cow” originated from early forms of currency in the form of livestock.

 

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The International Space Station is the most expensive object ever built at $150 billion U.S.

 

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Sea shells were once commonly used as money in many parts of the world.

 

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Even spending $1 million a day, it would take Bill Gates 218 years to spend all his money.

 

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Credit cards originated in the U.S. during the 1920s and could be used at individual companies.

 

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The first credit card that could be used at a variety of companies was introduced by the Diner’s Club in 1950.

 

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The first national bank card was BankAmericard, which began in California with Bank of America in 1958. It was later renamed VISA in 1976.

 

Infrogmation of New Orleans / WikiMedia Commons

 

Apple earns $300,000 per minute.

 

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The Secret Service was originally created to fight counterfeiting in 1865.

 

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It takes 12-15 years of training to become a money engraver.

 

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The first gold rush in the U.S. happened in 1799 in North Carolina, when a 12-year-old boy found a 17-pound gold nugget on his family’s farm.

 

Public domain / WikiMedia Commons

 

The average adult has between 8 and 10 credit cards.

 

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Walter Cavanagh, also known as Mr. Plastic Fantastic, has more than 13,000 credit cards.

 

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The Latin E Pluribus Unum means “one out of many” and means one country out of many.

 

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A $1 bill lasts an average of 18 months, a $5 bill lasts two years, a $10 bill lasts three years, a $20 bill lasts four years, and $50 and $100 bills last an average of nine years.

 

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38 million notes with a face value of $541 million are printed every day.

 

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Ninety-five percent of the notes printed each year replace those already in circulation.

 

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Almost half of all notes printed are $1 bills.

 

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Paper bills are made of 25% linen and 75% cotton.

 

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Martha Washington is the only woman to appear on a U.S. currency note back in 1886, 1891, and 1896.

 

U.S. public domain / WikiMedia Commons

 

A two-cent coin was minted between 1864 and 1873.

 

Brandon Grossardt for the photograph; James Longacre for the coin design., Public domain / WikiMedia Commons

 

The marks “S,” “D,” “P,” or “W” designate the Mint where the coin was produced.

 

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The four U.S. Mints are located in Philadelphia, Denver, San Francisco and West Point, New York.

 

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Quarters were originally made of silver.

 

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Lady Liberty was on the quarter for over 100 years before being replaced by George Washington in 1932.

 

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The penny is the only coin where the figure faces to the right.

 

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A penny costs more than a penny to make (about 2.4 cents).

 

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The largest U.S. currency was the $100,000 bill.

 

National Numismatic Collection,National Museum of American History / Wikimedia Commons

 

A farm in Delaware mulches 4 tons of U.S. bills into compost daily.

 

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Counterfeit currency is frequently detected because they are more perfect than actual currency.

 

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454 bills are equal to one pound.

 

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The most counterfeited bill is the $20 bill.

 

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Each bank printed its own money until the Federal Reserve was established in 1913.

 

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The $1 bill contains many references to the original 13 colonies (look for things in 13).

 

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Many communities throughout the U.S. have their own currency, such as Walt Disney World.

 

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The 1913 Liberty Head nickel sold for $43.7 million, with only 5 known to exist.

 

US Mint (coin), National Numismatic Collection (photograph by Jaclyn Nash) / Wikimedia Commons

 

Coins have ridges to deter counterfeiting, as people used to shave the edges off coins back when they were made of gold and silver.

 

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There are 119 grooves on the outside of a quarter.

 

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No living person can have their face on currency.

 

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Queen Isabella of Spain was the first woman to appear on a U.S. coin.

 

United States Mint – Charles Barber / Wikimedia Commons

 

Benjamin Franklin and Alexander Hamilton are the only non-President to appear on a U.S. bill.

 

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$2 bills are largely considered unlucky.

 

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Eighty-five to 95% of paper money contains traces of cocaine.

 

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The $1 bill hasn’t had a redesign in over 50 years.

 

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Security threads on different U.S. bills glow in different colors.

 

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All U.S. bills cost less than 20 cents to make.

 

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All U.S. dollar bills are printed in either Washington, D.C. or Fort Worth, Texas.

 

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The original Article of Confederation (the predecessor to the Constitution) gave states the right to make their own money.

 

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“Greenbacks” were paper currency issued by the U.S. during the Civil War.

 

National Numismatic Collection,National Museum of American History / Wikimedia Commons

 

“Greybacks” were paper currency issued by the Confederate States of America during the Civil War.

 

National Numismatic Collection – National Museum of American History / Wikimedia Commons

 

Two-thirds of U.S. currency is found outside the U.S.

 

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7 tons of ink is used to print money every day.

 

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There are 293 ways to make change for $1.

 

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A bill can be folded 4,000 times forward and backward before it will rip.

 

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The motto “In God We Trust” first appeared in 1963.

 

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The bird on the silver dollar was a real eagle named Peter.

 

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Coins can last an average of 30 years in circulation.

 

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One million $1 bills would weigh 2,040.8 pounds, while one million in $100 bills would weigh only 20.4 pounds.

 

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The slang “buck” comes from times before paper money when Americans would trade buck animals for goods and services.

 

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The U.S. officially adopted the dollar as its unit of currency in 1785.

 

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The U.S. went off the gold standard (currency is backed by gold) on August 15th, 1971.

 

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The only number on a coin is the year it was minted.

 

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There are between 7.5 and 9 billion $1 bills in circulation at any given time.

 

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The motto on the first U.S. coin was “Mind Your Business.”

 

Scovill Mint in Waterbury, Connecticut / WikiMedia Commons

 

Nickels are more expensive to make than dimes.

 

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The clock in the steeple of Independence Hall on the back of the $100 bill is set to 4:10.

 

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North Korea is the greatest culprit of counterfeit American currency.

 

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Today’s pennies are made from 95% zinc and coated in copper.

 

 

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The total outstanding U.S. consumer debt is currently $3.9 trillion.

 

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Thirty-seven percent of all households carry some sort of credit card debt.

 

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One in five Americans have a zero or negative net worth.

 

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Gambling in the U.S. brings in more revenue than theme parks, sporting events, cruise ships and music combined.

 

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Ninety-six percent of Americans will not be able to retire by age 65.

 

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The total amount of outstanding student loan debt hit $1 trillion in 2012.

 

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The average new car loan is now more than $30,000.

 

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The average American will pay more than $600,000 in interest over their lifetime.

 

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Twleve percent of the money taken home by the average American family is spent on interest.

 

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Forty-seven percent of Americans cannot cover a $400 expense without borrowing money or selling something.

 

 

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Whew!

What a list of money facts. The founding fathers would be proud.

While the majority of our articles seek to impart deep and profound finance knowledge, we thought we’d change things up a bit for the election by compiling 101 fascinating money facts for you to peruse and do with what you will.

Hey, at least you’ll be able to clean up on Jeopardy night!

Talk about Money Learned.

 

Read more:

This article originally appeared on MoneySavedMoneyEarned.com and was syndicated by MediaFeed.org.

 

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