Teaching Kids About Compound Interest: A Parent’s Guide

As parents, we often strive to prepare our children for the future, and one of the key life skills that can significantly impact their adult lives is financial literacy. Unfortunately, financial literacy isn’t really taught in schools. Understanding compound interest, a concept in finance, is a powerful part of this education. Let’s learn a little bit more of how you can show your kids about interest and how compounding can help them in the future.

Why Teach Kids About Compound Interest?

Compound interest is the interest you earn on both your original money and on the interest you keep accumulating. In simpler terms, it's “interest on interest” and can help savings or investments grow at a faster rate over time. Teaching children about compound interest helps them make smarter financial decisions in the future, like saving for college, buying a car, or even planning for retirement. Showing them a calculator that can really show how money can grow is often helpful. Now, a 16 year old isn’t going to think that saving money for 30 years is going to sound like fun. As a parent, you just have to accept that but really push them in the right direction.

Start with the Basics

Begin by explaining the basic concept of interest. You could say, “Interest is like a reward you get for saving your money in a bank or a penalty you pay for borrowing money.” Use real-life examples like earning allowances or saving up for a toy to illustrate these points. For little kids, the toy example is a little difficult for them to understand but hey, it never hurts to start early!

Use Simple Examples

A great way to explain compound interest is through relatable examples. For instance, use their allowance as a starting point. Say they save $10 every month in a 'bank' (which could be a piggy bank or a jar). Add a small amount, like 50 cents, at the end of the month as 'interest.' The next month, calculate interest on the new total (the original amount plus last month’s interest).

Interactive Activities

Make learning interactive with simple activities. Create a chart or a graph to track savings and interest over several months. This visual representation can help them see how their money grows over time with compound interest.

Utilize Online Tools

There are many online compound interest calculators available. Sit with your child and show them how to use one. Input different amounts, interest rates, and times to show how these variables affect the growth of their savings. Using our compound interest calculator is going to help visualize money growth over time. Use it!

Real-Life Application

If they’re old enough, consider opening a savings account for them. This not only gives them a real-world application of the concept but also instills the habit of saving. Monitor the account together and discuss how the interest is adding up each month. Let them make a few little mistakes so you can use them as teachable moments. (this one isn't fun to do!)

Set Goals

Encourage them to set a savings goal. It could be a toy, a book, or a video game. Help them calculate how long it will take to save up for it, including the interest earned. This makes the concept of compound interest more tangible and goal-oriented. Set goals but also let them know when they failed or made a mistake. Learning from your mistakes is the one of the best ways to learn. It's better to learn on small money mistakes than BIG ones!

Interactive Activities

Make learning interactive with simple activities. Create a chart or a graph to track savings and interest over several months. This visual representation can help them see how their money grows over time with compound interest.

Interactive Activities

Teaching kids about compound interest is not just about learn financial literacy, it's about setting them up for a future of informed financial decisions. Even simple concepts like this, aren’t really taught in school these days (or maybe they never were). In high school oftentimes, they just show you the real basic stuff, including simply…how to write a check. Remember, the lessons they learn today about compound interest could be the beginning of their financial foundation.