Albert Einstein described compound interest as “the most powerful force in the Universe”! Now that’s something! As the most powerful force in the universe–or at least one of them–shouldn’t we teach our children about compound interest?
An easy demonstration for kids follows–
First Day–Explain to your child what interest is. Then explain that compound interest is interest which is calculated not only on an initial sum of money but also on the accumulated interest.
You can visually show your child how this happens by asking your child to put one dollar that s/he has saved into a big glass jar on the kitchen table. Tell your child that you will pay 50% interest on the money in the jar, on a daily basis, and you will do so for one week.
Obviously, 50% interest doesn’t occur in the actual world, and you should explain this to your child–but it makes the lesson easy for your student to understand. If you’d like to choose a lower interest rate, feel free to do so.
Second Day–Explain to your child that his/her dollar just earned 50% interest, and so you are adding 50 cents to the jar.
Third Day–Have your student figure out how much you will be putting into the jar today. The answer is 75 cents.
Fourth Day–Again, make this a math lesson. Your student will start getting excited as s/he realizes how much “free” money is accumulating. On this day, with $2.25 in the jar, you will be adding $1.13 in interest (go ahead and round up when necessary).
Fifth Day–You have $3.38 in the jar which means the interest today will be $1.69.
Sixth Day–The jar has $5.07 in it. This means that today’s interest will be $2.54.
Seventh Day–The jar contains $7.61. When you add today’s interest ($3.81), your child will have $11.42!
Now, explain that if you wait to save, it hurts your wallet. If you only invest for five days, you make $5.49–not $11.42. The main component here is time.
A similar and fun math project is to then ask your child–hypothetically, if given a choice, would you like this $11.42 now, or a penny doubled every day for a month? Give your student a calculator (one will probably be necessary), and let her figure it out. A penny doubled every day for a month comes out to over 5 million dollars! Again….a lesson in compound interest!
Remember–fun learning is forever learning.