A global survey two years ago found that 84% of people understood the definition of inflation. Only 42%, or half as many, understood compound interest, or the accumulated earnings from interest on savings and investments. This month, the United States offered initial details on a new program passed by Congress this year that could help Americans enhance their financial fluency on that key aspect of free enterprise.
Starting next July, parents of newborns through 2028 will be eligible to receive $1,000 as seed money for an investment account. Additional funds can be added by family members, donors, or employers. Once a child reaches age 18, this cradle-to-diploma money – “compounded” in government-regulated mutual funds or index funds – can be tapped to pay school tuition, buy a home, or start a business.
The ultimate goal is not material advancement. Rather, it is to teach young people to manage money with informed confidence, not fear, and to learn how to plan for crises and long-term needs.
That particular part of the plan – better financial literacy – inspired tech billionaire Michael Dell and his wife, Susan Dell, to put $6.25 billion into the initiative in order to reach children older than newborns, especially those in lower-income homes.
“We’ve seen what happens when a child gets even a small financial head start – their world expands,” Mr. Dell said in announcing his donation on Giving Tuesday. “As children begin to understand that they have these accounts, that creates a real need for our schools, our parents, our community organizations to really begin to grow financial literacy in the country.”
The idea of tax-advantaged savings vehicles for children is not new. It has had mixed results in a few states and in other countries. But the scale of this federal program – estimated at $15 billion through 2034 – is vast enough to give Americans less stress and more control over their financial futures, providing them a larger stake in the growth of the overall economy. If it works over time, each “seed” of $1,000 will bring a payback in safety and security.
