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Featured Experts
Robert R. Johnson
Robert R. JohnsonProfessor of Finance, Heider College of Business, Creighton University
Ron Auerbach
Ron AuerbachProfessor of Accounting, Bookkeeping and Economics at City University
Arash Fayz
Arash FayzCo-Founder and Executive Director at LA Tutors 123
Larry Duffany
Larry DuffanyPrincipal Owner, Raising Hope Financial Coach
Patrick Boyle
Patrick BoyleProfessor of Finance at King’s College London
Dr. Lisa Giddings
Dr. Lisa GiddingsAssociate Professor of Economics at the University of Wisconsin-La Crosse
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As a parent, you teach your children to take care of their physical and emotional health. It only makes sense to teach them to take care of their financial health as well. Whether you're saving or borrowing money, compound interest plays a significant part in your financial health.

Learning about compound interest instills kids with crucial life lessons regarding patience and delayed gratification. Albert Einstein said, "Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn't pays it." Once children understand compound interest, they may be more inclined to save their money, avoid credit card debt and become financially healthy adults.

Some people don't learn financial literacy until it's almost too late. It's how they end up with thousands of dollars worth of credit card debt or near retirement age without saving a penny. If children learn to manage money early in life, some of adulthood's worst financial mistakes could be avoided.

Compound interest money lessons should be relatable to children's lives. We've got exciting and fun ways to learn about compound interest that will stick with kids into adulthood.

What Is Compound Interest?

Compound interest is the interest calculated on the initial principal of a deposit plus the accumulated interest from prior periods on a loan or deposit. It is also known as interest on interest. Compound interest will grow at a faster pace than simple interest, which is calculated on the principal amount only. It compounds on a schedule that could be daily, monthly, annually or even continuously.

This graph shows the effect that saving even $1,000 can have when compound interest is earned over several years.

The Magic of Compound Interest

Understanding compound interest is easy once you get the hang of it. If you put $10,000 in an account earning only 5% interest and left it alone, at the end of one year, you’d have over $500 of interest earnings. Leave it there another year, and you’ve just made $1,000 in interest. By the end of the third year, you’ve got over $1,600 just in interest.

When you put money in a compound interest-earning account and leave it alone, your money will grow. If you add more money, then you’re really making your money work for you. Because now you’re not only earning interest on the original amount, you’re earning interest on your interest. It’s almost like magic!

The Magic of Compound Interest

Activities to Teach Kids About Compound Interest

You can teach children about compound interest in entertaining and lively ways, depending on their age. It can be a hard concept to grasp, but with visual aids and by using toys they already know and love, you can get this concept across to them in a way that will stick with them.

Bank of Treats Waiting Game

Compound interest for kids: bank of treats financial learning game for ages 4-11. You can build a paper bank and stack gummy bears, as shown on the right-hand side.

Ages: 4–11
Supplies:

  • Bank printable
  • Bag of candy: M&Ms, Skittle, gummy bears, mini marshmallows or other favorite treat.
  • Tape or glue stick
  • Crayons, paint, stickers and other art supplies
tip icon
OBJECT OF THE GAME

This game involves giving your child a small amount of a favorite treat to put in their “bank” and then providing the child with more treats in their bank after a short time to show how compound interest and delayed gratification can earn them more of their favorite treat. This is a good after-dinner game.

Play the Bank of Treats Waiting Game With Your Child
Download Printable Game

Compound Interest Marathon

Compound interest for kids: compound interest marathon learning game for ages 8-13. An illustrated child is running around the block to earn money and learn how it compounds.

Ages: 8–13
Supplies:

  • Label printables "Compound Interest" and "Interest-Free"
  • Two large jars
  • 78 quarters or other denomination of coins
tip icon
OBJECT OF THE GAME

To teach your child about the power of compound interest, you can spark their curiosity by setting out two big empty jars, giving them some coins, and telling them that they can earn money by completing a “marathon” around the yard.

Play the Compound Interest Marathon Game With Your Child
Download Printable Game

Double the Penny Challenge

Compound interest for kids: double the penny learning game for ages 13-18. An illustrated teenager is walking the dog to earn money and learn compound interest works.

Ages: 13-18
Supplies:

  • Double the Penny Challenge Worksheet and Label Printable
  • $81.92 in various denominations
  • Empty Jar
tip icon
OBJECT OF THE GAME

The Double the Penny Challenge will teach your teen how compound interest can add up quickly, but only if you leave your money alone. This is a good exercise if your teen has been asking for money for something they want or asking how they can earn more money by doing things around the house.

Play the Double the Penny Challenge Game With Your Child
Download Printable Game

The Power of Compound Interest Calculator

While it’s entertaining for kids to play games to learn how compound interest works in their lives, it can also be fun for them to see how the numbers look when they are plugged into a calculator. This exercise can also be eye-opening for parents as well.

Try the Compound Interest Calculator

After 10 years, your total balance is $29,542
After 10 years, 
your total balance is 
$29,542
Growth Over Time
Initial Amount
Total Contributions
Total Interest Earned
Totals by Source
Initial Amount:
$5,000
Total Contributions:
$18,000
Total Interest Earned:
$6,542
Compound Interest Table
YearStarting BalanceAnnual ContributionsCumulative ContributionsInterest EarnedCumulative InterestTotal Balance
1$5,000$1,800$1,800$237$237$7,037
2$7,037$1,800$3,600$320$557$9,157
3$9,157$1,800$5,400$406$964$11,364
4$11,364$1,800$7,200$496$1,460$13,660
5$13,660$1,800$9,000$590$2,050$16,050
6$16,050$1,800$10,800$687$2,737$18,537
7$18,537$1,800$12,600$789$3,526$21,126
8$21,126$1,800$14,400$894$4,420$23,820
9$23,820$1,800$16,200$1,004$5,424$26,624
10$26,624$1,800$18,000$1,118$6,542$29,542

5 Ways Parents Can Encourage Saving

Parents can teach kids about saving money and investing as soon as children understand how money works. For example, children may know that they can use their $10 birthday money to buy a Fortnite T-shirt or some of their favorite candy bars. By showing children the power of savings early, this value will be instilled in children for the rest of their lives. With these methods, parents can encourage saving instead of spending.

1. Teach Kids to Spend, Save and Donate

When Anisa Kurji, podcast host of Kids Money and More wanted to teach her kids about how to save, she used a three-jar system with jars labeled "spend," "save" and "donate." Initially, the "save" jar money didn't have much meaning to the kids as it was going to their bank account," she said. "It was a black hole that they didn't know if or when they'd see that money again."

So, she changed the purpose of the money to saving for a specific goal. They'd have to be patient and not spend the money until they reached their goal. She said they were instantly motivated to add more to their jar and not spend it the same day they got it. "After awhile, I'll encourage them to put money aside for longer-term savings and investing. But for their first few goals, it shouldn't take too long to achieve, or children will lose interest in saving."

2. Set up a Savings Thermometer

One day, financial coach Larry Duffany's son asked his parents for the newest electronic game. Instead of giving him the game, Duffany said they set up a savings thermometer. As his son was saving his money, he colored in the chart on the thermometer to see his progress. "Visual cues are important for younger learners," said Duffany. "He used this tracking chart to measure his progress and very quickly worked his way to that goal."

3. Play the Game of Monopoly

Monopoly is an excellent tool for teaching older children about money. One rainy afternoon, set up the game and see how fast your children learn lessons about saving and spending. They'll learn that if you are patient and use money as a tool to make more money, you'll come out ahead.

“A game like Monopoly illustrates the power of putting money to work,” said Brian McEvoy, senior vice president and senior retail banking officer at Webster Five. “Kids learn that if they own a property, anyone landing on it has to pay, and the more you invest in that property by putting houses or hotels on it, the more you get in return.”

4. Encourage Kids to Participate in the Buying Process

When you're out and about with your children or shopping online, show them how to read prices. For example, if you're in the grocery store, and they insist on Cheerios, point out how the generic version of Cheerios is cheaper. Tell them if they settle on the generic version, they can save the difference and put it toward a new toy or game they want instead.

"(Ask) your kids to search for the cheapest option available online (or in-store) whenever they see something they like," said Freya Kuka, a personal finance expert and founder of the personal finance blog Collecting Cents. "This helps your kids contribute to the family's economic wellbeing while also taking some of the load of your back."

5. Challenge Kids to Keep Their Money in Savings

Abraham said that a straightforward option is to add interest to your child's piggy bank whenever they save their money in it for a month. "Showing them that by delaying their gratification, they can increase their rewards can be made educational, fun and rewarding."

Insight From Financial Experts on Teaching Your Children About Money

  1. Why should children learn about finance and compound interest?

    Children should learn about finance because it will help them be on the right path of financial literacy and making better financial decisions as they mature into their preteen and teen years. With many kids being more socially aware these days, they'll see moms and dads and friends deal with monetary issues. Many children will even be earning their own money from doing chores around the house or helping neighbors out. The basic concepts of money, like identifying various coins and bills, are taught at an early age in public schools. I've helped teach third- and fourth-grade students about money. Even a preschool classroom may have a toy cash register with various play coins. Small children are also able to learn to identify shapes, sizes and colors by helping to sort them. So money is a concept that's introduced to some degree pretty early on in a child's development.

    Regarding compound interest, this can be part of middle school algebra classes. I've taught lessons where the seventh and eighth graders learned how the exponential growth formula works. When they learn this, they learn about a formula that directly connects to compound interest.

    In the world of finance, which I've taught on the college level and helped out on the high school level, we refer to this as the "future value formula." And students in middle and high schools will learn how to work with this formula.

    Compound interest is widely misunderstood, but people should understand it, whether they invest or borrow. It is one of the most powerful forces in the world for growing your wealth.

    At the most basic and most literal level, by definition, the earlier you understand the concept of compound interest, the greater the benefit. It's more than that, though. Compound interest is one of the fundamental reasons why saving money over a long period is beneficial. Saving money is equivalent to resisting instant gratification, and instant gratification is one of those non-cognitive traits like grit and perseverance that economists like James Heckman talk about that make us better off in the long run.

    The surest way to build true long-term wealth and achieve financial security is to invest in the stock market. Starting early is the key to successfully building wealth because of the effect of compound interest. Albert Einstein said that "compound interest is the greatest mathematical discovery of all time." Time is the greatest ally of the investor because of the "magic" of compound interest.

    Mistakes begin early in life, and people's biggest financial mistake is taking too little risk, not too much risk. In fact, a recent UBS study showed that millennials and the World War II generation have similar asset allocations — low allocations to equities and inordinately high allocations to cash. Both generations were shaped by cataclysmic financial events in their formative years — the World War II generation with the Great Depression and millennials with the 2008 financial crisis. Millennials need to begin compounding early and let that compounding work its patient magic over the decades.

  2. How old should kids be when you start teaching them good financial habits?

    I think starting in third or fourth grade is a good idea. By this age, students are more aware of money and can better understand parents and even classmates' financial struggles. This is an age when students will often be given various chores to do and get paid for it. But if you were to start in second grade, that's OK, too. Even these students would be able to grasp the basic notion that money can grow slower or more quickly.

    Children can really start to understand these ideas beginning at around the age of 5. Before that, they don't have much of a concept of money or ownership. It is a good idea to explain good financial thinking to children from a young age. You can explain how you make monetary decisions and discuss them with your children. You may have to simplify your language, but children understand much more than you would maybe expect.

    Even if it’s rare via a lemonade stand, a tooth fairy visit, a card with money from Grandma, money comes up for kids. Why not start then? Between ages five and seven, your child may start to see money on occasion, and even if it’s just a handful of quarters, encourage them to save a portion. Depending on how much it is, encourage savings as soon as they learn the concept of money. They certainly don’t need to spend it, especially at that age, so any slight savings should be encouraged.

    Teaching kids about money and savings should be taught early and often. Consider such discussions as on par with your family values. Children will observe their parent's relationship with money, and having discussions in the open will help generate good habits. Such behavior is a non-cognitive characteristic with many spillover effects aside from having more money when you are older.

    The earlier, the better. The idea of saving or investing is a choice between current consumption and future consumption. It is challenging for many people to imagine their future selves and give up current consumption in lieu of having money to retire on in the distant future. In 2018, the University of Chicago professor Richard Thaler received the Nobel Prize in economics for his work in behavioral finance. Behavioral finance's premise is that human beings aren't rational profit-maximizing machines but often succumb to behavioral biases. One of the biggest behavioral biases humans succumb to is the bias toward immediate gratification over delayed gratification. That is, our present selves tend to win over our future selves. Teaching children the basic lesson that passing up current consumption for greater future consumption can powerfully change the way people look at life.

  3. How should compound interest be taught to children?

    It's relatively easy to explain the basic concept. I would do it the same way I've explained it to adults. With interest, there are two ways it can be calculated. One is called simple interest. The other is called compound interest. With compound interest, your money grows faster. And who wouldn't like to have more money? You could even simplify this by leaving out the concept of two kinds of interest. So you could make it even simpler by just explaining that compound interest is a way for your money to grow more and faster. That's something even a kindergartner could grasp.

    I find many adults and sophisticated investors misunderstand compound interest. The simplest way of explaining it is by using graphs. Take $100 and invest it at 5% per year and 10% per year. Most people expect that the money invested at 10% will do twice as well. They are shocked to see that after 30 years, the person earning 10% interest has four times as much money in their account. You can then show them how much expenses like mutual fund fees or inefficient tax management can damage your long-term wealth.

    When interest rates were higher, one could advise parents to open a savings account for their children and watch the amount grow as time passed. Given the level of interest rates and the paltry amount of interest (and minuscule interest on interest), It's important to teach children to invest and not save. That is, in this unprecedented, low-interest-rate environment, they cannot save their way to financial security. They need to be taught to invest.

  4. What is one positive outcome you may expect to see if your child learns good financial lessons?

    Your child will have a better understanding of money and how it's essential to protect it and allow it to grow. By exposing children to good money management basics, they can develop good habits that will last a lifetime. Teaching them good money management early can help them avoid pitfalls like racking up huge credit card debt and not taking risk into account. So you have the opportunity to mold young minds to be more knowledgeable and cautious when it comes to managing money versus being more reckless.

    Giving a child good financial advice can be one of the most important gifts you can give them, as it will help them out for the rest of their lives.

    It is far more likely that children who have been given solid information and upbringing will make wise financial choices. They will come to see compound interest in savings and investments as working for them. They will likely shy away from using banks as savings institutions aside from emergency funds and checking accounts as the ROI is God-awful, especially when the banks are using that same money to fund credit cards, personal loans and home mortgages at much higher rates.

    Hopefully, they will also learn how to avoid using credit cards or taking out loans because they will understand that there is a much worse cost beyond the financial cost of interest on such loans/lines of credit. Opportunities are lost when paying the penalty for having bought something they couldn't afford.

    Saving is a learned skill. In 2020 with the short attention span of TikTok and the like, instant gratification on spending may be even more tempting than for our generation. If your child can see and experience the satisfaction of saving with compound interest, they may be more likely to carry on these habits. Who doesn’t want their child to grow up to have a great credit score?

    Hopefully, they will develop good habits and also encourage the spillover benefits of resisting immediate gratification.

    Basic financial literacy is incredibly important because financial mistakes made early in life can change the entire trajectory of one's economic circumstances. Teaching children about finance early in life can help save them from making crippling mistakes that haunt them throughout their lives.

  5. How can children be encouraged to save money?

    Children can be encouraged to save money by setting long-term goals, like saving up and paying for a toy they like. Explain that the reason they can have this nice toy is because they gave up buying a bunch of lower quality, more disposable toys.

    The key to motivating my kids has been to zero in on what is important to them. I have a hockey goalie who regularly needs new, expensive equipment. We require him to contribute to these expenses. Like his friends, many of the goods they demand are inexpensive or free, like iPhone apps, or way too expensive, like iPhones themselves. So, we try to provide him with an opportunity to save for something important to him that takes time but doesn't feel impossible.

    Children need to have goals for saving money. You may want to sit down with a child and determine a plan for setting up an account to fund that goal. For instance, it may be a trip to Disney World. Set up an account solely for that purpose and have the child periodically monitor how much is in the fund and how much more needs to be accumulated to meet that goal.

  6. What challenges will the children of today face when trying to save money for tomorrow?

    There are several challenges for kids today as they look to the future. First, they are oversubscribed in many cases. That means that their schedules are often so full of extracurricular activities that they seldom have time for a job, even if they wanted one. The days of having a paper route of your own as a kid are long gone. Subscriptions are down, and routes are longer and generally taken up by older adults with cars. With the increased cost of living that has outstripped income, many jobs traditionally taken by teens are now going to seniors looking to supplement pensions and social security income. Even babysitting has fallen off, partly because fewer people go out, but also because of the distrust of adults and the risks associated with being a pre-teen or teen in a secluded setting. We can add to that the inflated cost of education.


Ron Auerbach
Ron AuerbachProfessor of Accounting, Bookkeeping and Economics at City University
Patrick Boyle
Patrick BoyleProfessor of Finance at King’s College London
Dr. Lisa Giddings
Dr. Lisa GiddingsAssociate Professor of Economics at the University of Wisconsin-La Crosse
Robert R. Johnson
Robert R. JohnsonProfessor of Finance, Heider College of Business, Creighton University
Arash Fayz
Arash FayzCo-Founder and Executive Director at LA Tutors 123
Larry Duffany
Larry DuffanyPrincipal Owner, Raising Hope Financial Coach

Further Resources for Teaching Kids About Money

Still need more ideas for educating children about money? Additional resources for teaching kids about finances and compound interest include:

  • A Financial Literacy Handbook for All Life Stages: This MoneyGeek guide provides insightful resources and helps you establish good financial habits at all stages of your life. You'll find information on understanding your paycheck, student loans, buying a car on credit, understanding home loans and saving for retirement.
  • Financial Peace Junior: This kit from Dave Ramsey comes with fun stories and activities that teach children about money, work, giving, saving and spending their money in smart ways.
  • Foundations in Personal Finance: Another valuable Dave Ramsey resource is Foundations in Personal Finance, software that teaches teenagers financial literacy and essential topics such as saving and budgeting.
  • Greenlight: Greenlight is a debit card for kids that parents can monitor. Parents can put kids' allowance on autopilot and create in-app chore lists while tying the work to perks.
  • Kiddie Kredit: Kiddie Kredit is an app kids can use to track their chores and show them how to use their money wisely.
  • Kids Money and More: This podcast teaches kids about a new financial topic, including coming up with basic budgets and making SMART money goals.
About the Author


Kylie Ora Lobell is a personal finance writer covering credit cards, savings and loans for Slickdeals, SoFi, OppLoans and MoneyGeek.


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