Money Foundations for Kids: Compound Interest

Updated: December 7, 2024

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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
bank 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
coins 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
money 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
Ask the experts:

Why should children learn about finance and compound interest?

Assistant Professor of Family Life at Brigham Young University

Kids should learn about personal finance because nearly every decision has financial implications. The house you live in, the car you drive, the clothes you wear and the food you eat all have one thing in common—money! Compound interest is an especially important concept because it’s an often overlooked way to build long-term wealth. For example, suppose you saved $5,000 in an account earning 3% interest. If you add $100 monthly to the savings account, your balance will be $20,721 by the end of the 10th year. Continue saving $100 monthly and your balance is $41,934 by the end of year 20. That’s a difference of $21,213 (simply by starting 10 years earlier)! Age is on your side when you’re a young person who has developed the habit of saving.

Assistant Professor of Family Life at Brigham Young University

All children must learn, from an early age, three things when it comes to money and finance. The first is that money gives an individual the power to decide for themselves which items they can purchase and what needs to be prioritized with those purchase decisions.

Secondly, money creates an opportunity to exercise that power (in a positive way) and to determine who should be the beneficiary of those funds. Should the money be spent on themselves, saved later or given to others in greater need (or ideally, a combination of all three)?

Finally, appreciating the value of money through effort and hard work is a key lesson that children should learn so that their choices regarding what to do with it are grounded in an understanding of what had to be done to earn it in the first place.

Compound interest is the magic elixir that many children ignore or don’t comprehend and prioritize when they are first introduced to the power and opportunity provided by money. Understanding that sacrifice, patience, and the benefits of taking a long-term approach (over instant gratification) can yield huge rewards.

This is why I advocate for money management lessons (that address financial habits and planning) to be offered at different school grades (see below). The more educated children become with money, the more they can make informed decisions around proactive planning and comprehend the lessons of compound interest and other key financial tools.

When you are young, money should be enjoyed while still understanding that opportunity costs exist with how it is spent and what other choices you forego by pursuing a course of action.

Professor of Finance at California State University, Dominguez Hills, Author of "Finance for Kidz" series

Children should learn about finance because it is a life long skill that will help them throughout their life. Just like we teach our children not to put their fingers in electrical sockets, we should do the same with teaching them about finance. Once they learn the principles of finance, then, as parents, we don't have to worry about them making terrible financial decisions, just like we stop worrying about them putting fingers in sockets. In other words, it will become second nature to apply sound financial principles.

Compound interest is one of the marvels of finance. Compounding of interest is an easy way to make money without lifting a finger. Of course, money has to be kept in an interest-bearing account. When teaching compounding to children, one should also explain the rule of 72. That is, if one wants to double his/her money, then it will take 72/i years where i is the % of interest.

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Ask the experts:

How should compound interest be taught to children?

Professor Human Development and Family Studies at SUNY Oneonta

Compound interest is a complex math problem. Older school-age children can calculate the interest rates but may not fully understand the concept of interest accruing on a loan. Adolescents can understand these as they relate to purchasing an item over time (e.g., car loans, credit card payments or student loans for college). Parents can teach the concept of compound interest to children by having their child put money into a savings account and reviewing the interest earned on the savings each month. This concept can also be taught to older school-age or young adolescents through parents loaning them money for a more expensive item they want to purchase and charging them interest. A loan repayment plan can be made between the parent and the child to explain the idea of paying off a debt over time.

Director, K-12 Teacher Preparation Program and Professor of Practice at Merrimack College

Young children learn through visuals, play and real-life analogies to increase comprehension of more complex concepts. One example of teaching children compound interest is to use the snowball analogy. Explain that all you need to do is start with a handful of snow and begin to roll the snow. That handful of snow gets larger every time you roll it because the snowball collects more and more snow and continues to get bigger and bigger. The same is true for money saved. You start with a small amount of money, save it, and the longer you save it, the larger it gets, just like a snowball that you keep rolling. This example is a simple explanation for a younger child.

Founder & CEO at TeachMe TV

Compound interest is a complicated idea even for some adults. But the best way is to make it concrete and demonstrate what it means to earn simple interest first. You could do this with pennies. 100 pennies (or 1 dollar) earning 10% over one year (easy numbers) means you're showing them that they earn .10 on their dollar. That's 10 extra pennies they didn't have to work for. Then you would demonstrate how that same dollar would earn even more because if you are compounding interest, you are adding money each year as interest and then adding more money interest on top of the interest they've already earned. You could show them that not only do they earn more money on their money, but then they're making money on the interest in that money. It's important to show them and have them engage in counting and estimating how much money they could earn by saving, etc. The converse is also true. Showing children if they borrow money, what they must pay back is so much greater than what they initially borrowed. Again, concrete lessons, acting it out with characters in a script (or puppet show for very young ones), using real money to count — or even bingo chips — makes it real and much more understandable.

Having said that, these lessons are much more powerful when children have some ability to understand the math behind the concept. Meaning that children around third grade and after have some knowledge of multiplication, money, decimals and percentages (fourth and fifth grades). This prior knowledge will mean that the lessons will have a greater and more lasting impact.

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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."

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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.
  • How to Identify and Address Financial Child Abuse: This MoneyGeek guide provides crucial information on recognizing the signs of financial abuse in children and offers steps to address and prevent it.
  • 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.
  • Finance For Kidz: Finance for Kidz is a set of books covering the basic topics of finances presented in an engaging manner, so as to get kids interested in various aspects of finance.

About Nathan Paulus


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


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