So, how do I talk to my kids about interest?
Age 5-7:
What is interest? Interest is a reward the bank gives to you for saving money.
- Always save something: Explain that when they earn pocket money, it’s good to get into a habit of putting some away for later (in a piggy bank or a digital tool).
- Waiting is rewarding: A simple way to teach "interest" is to offer a reward for waiting. You may be familiar with the marshmallow test. For example, give them a lolly or treat, set a timer and say, "If you wait 5 minutes without eating it, I'll give you one more!". For older children in this range, you could consider incentivising saving – either a reward for not spending over a week, OR a parental contribution if they can save $10.
Ages: 8-10:
Children at this age are learning about multiplication and division, then percentages.
What is interest? Interest is a reward the bank gives to you for saving money. Interest is a small percentage of our account balance.
- Interest on savings: Banks give you extra money (interest) for keeping your money with them. Show them an interest rate and explain that you multiply the numbers together to calculate interest – e.g. $100 x 5% annually means $5 interest. If they have a savings account, show them regularly the interest that is being earned.
- Interest earns interest: The magic with interest is that the interest that you earn, also earns interest. This is why the more you save, and the longer you wait, the faster your savings grow.
- Borrowing and paying interest: Introduce the flip side: borrowing money means you’ll have to pay back more than you borrowed, explaining that the "extra" is the interest cost.
Activity Idea:
- Save with the bank of mum and dad: At the end of each week, if your child saves a dollar, offer to "add interest" by giving them an extra 10 cents for each dollar at the end of the month. Use a visual to show them how their savings grow faster with interest – by tallying up each week their contributions and interest, or by using a jar.
Ages 11-13:
- Compound interest: Explain that not only does their money grow, but the interest can also earn interest, making their savings grow even faster over time. This is why it’s great to start saving early. Use simple numbers to show how compound interest works, or an online calculator. You can also use the “Rule of 72”. Divide 72 by the annual interest rate to figure out how long it will take to double your money. For example, with 6% interest paid annually, you can double your money in 12 years.
- Credit and loans: Begin introducing the concept of borrowing more formally. Explain that borrowing comes with a price—interest—and that borrowing too much can lead to financial problems. Just as interest helps your savings grow, it also makes debt grow as well if it’s not paid off.
Activity Idea:
- Savings goal with interest: Help them set a savings goal for something they want to buy, like a toy or gadget. Offer to add 5% “interest” if they hit their savings goal in a certain amount of time, and show them how much faster they can reach their goal by saving more consistently.
- Interest on saving vs. borrowing: Compare different interest rates for mortgages or personal loans compared to savings interest rates. Consider why the interest rate for borrowing money is always higher.
For the super keen:
- The formula for compound interest
- A =P (1 + r/n)nt
- P = starting balance
- r = interest rate
- n = number of times interest applied per time period
- t = number of time periods
- A = final balance
Use an online calculator to model out how much money you will end up with if you make regular deposits over time and earn interest.
Simple interest is paid just on the amount you started with. Compound interest is interest paid on both the amount you started with and the interest you’ve earned to date. That’s why your savings grow faster over time.
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