If you want to give your kids a head start in investing, there is one powerful concept
they must learn – compound interest. VINCENT TONG from Fundsupermart explains how.

Teaching kids the miracle of compound interest is potentially one of the most valuable lessons you can give them in life. While the saying “old habits die hard” has a negative tinge to it, why not use it on something beneficial so that your kids bring this habit all the way to adulthood?

THE BEAUTY OF COMPOUND INTEREST FOR KIDS

In its simplest form, compound interest is about turning money into more money. But for many kids, it can be difficult to grasp something so abstract.
For the purposes of this article, we’re assuming your child is able to control their spending, and understands percentages.

According to typical school standards, most children between the ages of 9 to 12 have already learned to apply percentages in class.

A more practical guide is if your child knows how to split a chocolate bar into equal halves, then chances are they’ll know how to split it equally into ten parts i.e. ten percent.

So here’s a simple activity to illustrate what compound interest is, and how it works.

ACTIVITY: BEING THE BANK!

Step 0:
Tell your child, “I want to show you how you can double your money in one week.” If they have a fair grasp of money, they’ll know more is better, and hopefully they’ll pay attention.

Step 1:
Show them $10. Before they run off with it gleefully to buy ice cream, tell them, “I’m going to show you how to turn this $10 into $20, on the condition that you not touch it for a week.” Put the $10 in a jar in the living room, and tell them they are not supposed to open it until a week later. Make sure that the jar is transparent and labelled with some imaginative message like “The Ng Family Bank” or “The Bank of Daddy”.

Step 2:
Tell them, “Every day, I will add 10% to the money already in the jar.” You may have to explain to them how much 10% is. Give them a table to fill out every day, so that they can track the amount of money already in the jar.

Table of compound interest
Use this table for Step 2

Step 3:
For the next 7 days, add the appropriate interest amounts into the jar. (And do check occasionally to ensure that they do not take any money out from the jar prematurely!) Have your child fill in the ‘Total’ column in the table, and if they’re particularly keen, the ‘Interest’ column as well.

Step 4:
At the end of Day 7, your child should have the following table.

Open the jar and ask them to count the money.

Step 5:
Now comes the toughest part – the explanation. On a piece of paper, write the initial capital amount of $10.

Ask them how much 10% of $10 is, write $1 below it, and sum it up to $11. Next, ask them how much 10% of $11 is, write $1.10 below it, and sum it up to $12.10. Repeat this process until you arrive at $19.48. The end result should be something like the Example 2.

This should illustrate clearly how the interest increases – from $1.00 to $1.77 by the end of the week. To make this more obvious, you can use different colours for the interest amount.

Remember to ask them on the interest amounts. Engaging them this way is much more effective in getting the message across than by explanations alone.

Step 6:
Finally, ask them what they have been doing this week. Chances are that they will answer with “playing”, “sleeping”, “eating”, or “schooling”. After some responses, tell them that while they were doing all these activities, the “bank” is actually paying them interest. This process is called ‘compound interest’.

You may want to vary your interest rate, but remember not to set it too high. This will help avoid setting the unrealistic expectation that it is easy to double your money in just one week.

THE NEXT STEP
Hopefully, your child will have grasped the concept of compound interest. Optionally, to be really sure, you may want to reverse roles, and let your child be the banker. Give them a bag with the money for interest payments that they can pay out every day.

So now that they have an idea of what compound interest is, the next lesson is on savings, and how it works with compound interest together to increase their money.


    1 Response to "Teach Your Kids The Power of Compound Interest in a Week"

    • Pokjat

      Nicely put to suits kids.I bet this will be effective as describes. Thanks KC lau!

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