Making Compound Interest Real for Your Kid
Every year I try to add to what my kids are doing with their kids on the personal finance front, by holding a week long Grandma Money Camp.
This year I introduced interest and compound interest. I searched high and low to find a way to make the concept real to my 8 year old grandson and introduce the idea to my (almost) 5 year old granddaughter.
This concept will be reinforced every year in some age appropriate way. Kids the age of my grandchildren need and want visual active ways to learn. They are far enough apart in age that one thing won’t work for both of them.
Here is what we did to introduce compound interest concepts.
Talk about what interest is.
Just to begin, I just made a simple statement that interest is what the bank gives you to keep your money with them in your bank account.
Take a week and let it build.
We started with a plastic see through tub with a lid. In it, we put one dollar. I had the kids guess how much money would be in that tub if we added 50% to the money in the tub each day. I wrote their guesses on a little paper and taped it to the top of the tub lid.
Add it up.
Each morning of Money Camp, my 8 year old grandson’s job was to count up the money in the jar, calculate what the total times 50% would be to see what we needed to add that day. Although he needed some assistance using the calculator, he did this all himself, recording each days results with a pencil and paper.
My granddaughter then got to help us add the ‘interest’ to the money in the jar.
It got interesting.
At first, the amounts we needed to add were small and fairly uninteresting, but along towards the end of the week, the kids started seeing some exciting results.
On the last day, before he did the calculations, I indicated that there would be a surprise, which added even more to their excitement.
On that last day, we had to add $5.70 to the tub, making the total amount accumulated $17.08. After they got done stuffing all those bills in the tub, I shared my surprise – they got to split the money and keep it!
Here is the day by day chart:
|Day||Start Amt||Add Amt||New Amt||Rate|
They will forget.
It was a fun little activity (and lucrative!) for them and it did introduce the concept of interest (which I reinforced each day as my grandson calculated and my granddaughter added the interest to the tub), but I know they will forget. Their parents will occasionally reintroduce the idea of compound interest and they will hear about it for many years in Money Camp as well.
What else can you do to teach your kids about compound interest?
Albert Einstein called compound interest the eighth wonder of the world. You might want to make sure your kids know how to use it to their advantage.
Get them their own bank account and let them watch interest in action.
Pay them interest on the savings in their piggy bank if they are too young to have a real bank account.
Videos on the internet
Camp Millionaire demonstrates simple vs compound interest in this 9 minute video.
FINRA has a 30 second summary of the difference between spending and saving in a compounded account.
Money Works 4 Me has a seven minute video that starts with a story.
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Have you intentionally taught your children about the power of compound interest? When did you start and how did you teach it?