Teaching kids about money: you can teach kids about compound interest?!
Sounds crazy, but you can do it folks. And we’ve got activities for different age groups to help.
To be honest, I was never really a ‘math kid.’ To be even more honest, I wasn’t much of a ‘math young-adult’ either. Maybe your kid is like me, or maybe they’re a math genius in the making – but teaching them about compound interest doesn’t need to take a lot of number crunching.
Plus, it’s important. Believe it or not, compound interest comes up a lot for kids and teens outside of math tests. Understanding how it works can help prepare them to make good choices about what banks and accounts they’ll use – and it even spins off into other important concepts like credit cards and mortgages. Getting the basics down early helps kids avoid some serious pitfalls as they take charge of their own finances.
In a nutshell, there’s simple interest and compound interest:
Simple interest is what you earn for keeping your money in an account without reinvesting it. If you start with $100 and earn, say 5% interest annually, you’d have $105 at the end of the year – your initial $100 investment and your $5 of interest. You withdraw it and call it a day.
Compound interest is what happens when you reinvest the interest you’ve earned. If that $105 is reinvested, the next year you earn $5.25 of interest. This small growth can add up to more than you’d think over time.
But how do we make that clear and meaningful to kids? Well, like in previous posts, I have some activities and practices to help parents out:
Ages 5-10: savings jar interest from the bank of parents
Remember the three clear jars from the second post in this series? We’re building right off that with a practice that makes compound interest visible and fun.
A few weeks after your kids have set up their jars, talk to them about their Savings. “How’s your savings jar coming along?” or, “Do you think you’re getting close to your goal?” are good questions to kick off the conversation. Then ask if they know what interest is.
You know what? They might already know. Or they may have heard of it. It’s great to give kids a chance to flex what they know before telling them everything. Plus, you’ll be able to figure out what their understanding is and meet them where they are when you explain.
Generally, you can say something along the lines of, “Interest is how your money grows while you save it. The more you save and the longer you save, the more and more it grows.” That’ll typically grab their… ahem… interest. Now it’s time to demonstrate:
- Grab a $10 bill and some change – a couple loonies and some dimes will probably work for this example. I used to do this with pennies, but their day is done.
- Tell your kiddo that for every dollar (hold up the loonie) they have in their Savings Jar at the end of the month, they’ll get ten cents added to it from ‘the bank.’ That’s ten percent (I’d throw in that ‘per cent’ means ‘for every 100’ if that works for your child). With $10 (hold up the bill), you’d get $1 of interest. That’s 11 bucks now.
- Explain that the next month if they keep their interest and don’t spend it, that $11 would now earn them $1.10 of interest instead of just $1. Hold up the loonie and a dime.
- Now, apply that idea to what they actually have in their Savings Jar. Give them a date (soonish from the conversation) when they’ll get their interest payout. Tell them what they’d get next month if they left everything in there – or if they added more. That’s compound interest!
- Remind them that these little bits add up to a lot more than they’d think over time.
I’d encourage you to do a monthly finance chat with your kids. The interest payout may bring them to the table, but the regular tracking and mindfulness around their goals is an incredible habit to build from a young age.
Ages 10+: you vs. me – interest at 50 showdown
The chance to beat your parents at something was always a big draw for me as a kid. A little you vs. me, done nicely of course, really demonstrates how powerful saving earlier in life can be.
Again, start by finding out what your kid already knows. Depending on their knowledge level, fill in any blanks and offer to show them how it works with a little contest.
The heart of this activity is showing that the longer you save, the more interest will compound. That leads to way more money over time.
The key lesson: the longer you save, the more of a difference it makes. Starting the habit of saving early can help earn your kid some serious bucks down the line. Depending on how they’ve taken to the idea, it may be time to get them a high-interest savings account of their own.