Compound Interest - Fun?

You know how important it is to teach your child to save money. You know that you need to start when they are young so that they develop a good attitude toward money that will stay with them throughout their life.

What is the right age to start? How can you incorporate education about balancing spending with saving money into your child’s daily life without boring them to tears? How can he understand the concept of compound interest at an early age without reading a financial textbook?

It’s actually easier than you think as long as you turn it into fun.

Start Young and Be Consistent
If your child wants a particular toy, start a savings project for them. Get a decorative, colourful savings jar. Have your child draw a picture of the toy they want or go through magazines to find a picture of the toy. Paste the drawing or picture on the outside of the jar, but make sure the jar is transparent so that your child can see the money accumulating inside.

If your child gets pocket money, discuss with them how much of the pocket money they want to put into the jar each week. Explain to them that you will add ‘interest’ to the savings jar on a regular basis.

Once a week, sit down with your child at the table. Take the money out and help your child count it. Then explain that you are adding a bonus, a certain amount based on the amount that is in the jar, and that you will do that every week.

Each subsequent week, make it clear that you put more into the jar because you are paying them interest on both the money that they have put in and the money you previously added as interest. Keep a sheet with the jar that delineates how the money is adding up. This sheet will go far to help them understand the time value of money.

At first, they won’t understand the concept of ‘interest,’ but eventually they’ll get the idea of compound interest and may want to delay gratification by saving more of their pocket money each week so that they will be able to buy the toy they want sooner.

Before you know it, your child will understand that they can put away money now for more in the future, and you will have helped them develop a healthy attitude toward finances. 

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