How to Teach Kids About Compound Interest
Begin by giving your child a dollar., Write them a receipt for the “deposit.” Explain that you are the "bank" and that they can earn more money if they give you the dollar back to hold., Give them a penny for interest each day., Show them how much...
Step-by-Step Guide
-
Step 1: Begin by giving your child a dollar.
Get a dollar bill and give it to your child.
Explain that you are going to teach them about something called interest.Understand that this method doesn’t demonstrate compound interest.
The point of this method is to show kids what interest is.
Show this to your child first if they are struggling to understand interest. -
Step 2: Write them a receipt for the “deposit.” Explain that you are the "bank" and that they can earn more money if they give you the dollar back to hold.
Make sure to explain that they will get their dollar back, along with more money, when the game is over.
To make your point, give them a "receipt" showing their deposit and current balance ($1.00).
Explain to them that it is important to keep these receipts in a safe place so that they have proof that they have put that money into the “bank.” , Explain to your child that they will earn a penny for each day you let them hold their dollar.
When you deposit a penny, place it in a container that is their “bank account.”If your child doesn’t know about how banks work, be sure to explain what a bank is.
Explain that a bank is a place where you can keep your money safe, and that when you put your money in the bank you are agreeing to let the bank use your money, but it will all be there when you need it. , Explain how to find out how much money is in their bank account.
In this case, explain that all they have to do is ask you.
At the end of one week (or however many weeks you want to do this demonstration), ask your child to check their balance.
Ask them to check their receipts to figure out how much money they have put into the bank.
When they do this, then dump out the pennies, and ask them to count the pennies.
Explain that the extra pennies are interest that they've earned.Explain that the original seven pennies have grown to eleven pennies (assuming you added one penny every other day) because the bank paid a penny of it’s own into the account as a thank you for allowing them to use your child’s money. , Ask the child to withdraw some money from the bank account.
Demonstrate that this means reducing their balance, meaning that they now have less money in the account.
Give them a new receipt showing the balance after the withdrawal. -
Step 3: Give them a penny for interest each day.
-
Step 4: Show them how much money they have accrued.
-
Step 5: Illustrate the effects of spending.
Detailed Guide
Get a dollar bill and give it to your child.
Explain that you are going to teach them about something called interest.Understand that this method doesn’t demonstrate compound interest.
The point of this method is to show kids what interest is.
Show this to your child first if they are struggling to understand interest.
Make sure to explain that they will get their dollar back, along with more money, when the game is over.
To make your point, give them a "receipt" showing their deposit and current balance ($1.00).
Explain to them that it is important to keep these receipts in a safe place so that they have proof that they have put that money into the “bank.” , Explain to your child that they will earn a penny for each day you let them hold their dollar.
When you deposit a penny, place it in a container that is their “bank account.”If your child doesn’t know about how banks work, be sure to explain what a bank is.
Explain that a bank is a place where you can keep your money safe, and that when you put your money in the bank you are agreeing to let the bank use your money, but it will all be there when you need it. , Explain how to find out how much money is in their bank account.
In this case, explain that all they have to do is ask you.
At the end of one week (or however many weeks you want to do this demonstration), ask your child to check their balance.
Ask them to check their receipts to figure out how much money they have put into the bank.
When they do this, then dump out the pennies, and ask them to count the pennies.
Explain that the extra pennies are interest that they've earned.Explain that the original seven pennies have grown to eleven pennies (assuming you added one penny every other day) because the bank paid a penny of it’s own into the account as a thank you for allowing them to use your child’s money. , Ask the child to withdraw some money from the bank account.
Demonstrate that this means reducing their balance, meaning that they now have less money in the account.
Give them a new receipt showing the balance after the withdrawal.
About the Author
Jacqueline Rivera
Brings years of experience writing about practical skills and related subjects.
Rate This Guide
How helpful was this guide? Click to rate: