Module 8: The Power of Compound Interest for Kids

 FINANCIAL LITERACY LEARNING RESOURCES 

Compound Interest for Kids

What is Compound Interest?

Imagine you have a magic piggy bank that not only keeps your money safe but also adds extra coins to it! This extra money is called interest. When you save or invest money, your bank or investment account pays you interest as a reward for letting them use your money.

How Does Compound Interest Work?

Compound interest is like a snowball rolling down a hill. As the snowball rolls, it gathers more snow, getting bigger and bigger. Here’s how it works in simple terms:

1. Initial Amount: You start with a certain amount of money, called the principal. For example, let’s say you save $100 in your piggy bank or bank account.

2. Interest Rate: The bank pays you interest on your money. This is usually a percentage. Let’s say your bank gives you 5% interest each year.

3. Interest Calculation: At the end of the first year, your bank will calculate the interest on your initial $100. So, 5% of $100 is $5. That means at the end of Year 1, you’ll have:

• Initial Amount: $100

• Interest Earned: $5

• Total Amount: $100 + $5 = $105

4. Next Year’s Interest: In the second year, you earn interest not just on your original $100 but also on the $5 interest you earned in the first year! So now, you calculate 5% of $105.

• 5% of $105 = $5.25.

• At the end of Year 2, you have:

• Total Amount: $105 + $5.25 = $110.25

5. Continuing the Cycle: This process continues every year. The interest you earn gets added to your total, and then the next year, you earn interest on this new total. It keeps growing and growing!

Why is Compound Interest So Powerful?

1. Growth Over Time:

• The longer you keep your money in the bank, the more it grows. The magic of compound interest really kicks in over many years. If you leave your money for 10, 20, or even 30 years, you could end up with a lot more than you started with!

2. Start Early:

• The earlier you start saving or investing, the more time your money has to grow. Even if you start with a small amount, like $100, if you leave it for a long time, it can turn into a much larger amount thanks to compound interest.

3. Examples of Growth:

• Let’s look at an example to see how powerful compound interest can be:

• If you save $100 at a 5% interest rate, after:

• 1 Year: $105

• 5 Years: about $127.63

• 10 Years: about $162.89

• 20 Years: about $265.33

This shows how, over time, your money can grow significantly!

The Importance of Saving Early

• Make It a Habit: Saving money regularly, even if it’s just a little, can help you build your wealth over time. For instance, if you save $10 every month in addition to the initial $100, it will grow even faster!

• Dream Big: You can use the money you save for big dreams like college, a car, or even starting your own business. Understanding compound interest helps you see how your money can work for you!

Conclusion

Compound interest is a powerful tool that helps your savings and investments grow over time. By saving and allowing your money to earn interest on itself, you can build a brighter financial future. So remember, start saving early, keep your money invested, and watch it grow like a snowball rolling down a hill!