How to explain how saving interest works to a child

As a parent, one of the hardest challenges we face is teaching our children about the importance of saving money. Even as a 50-year-old man, I find it difficult sometimes to save myself, especially when some new shiny gadget is out there to attract my attention.

It wasn't until the 1990s when banks in the UK started offering interest on savings accounts that I discovered a way to make saving appealing to my daughter, who had a strong desire to earn money. However, she often struggled with the temptation to spend her hard-earned cash.

I struggled to explain the concept of saving to her, and even though she understood the idea of setting money aside, it wasn't until we opened a bank account that things really clicked for her. Explaining how interest worked was challenging enough, but when it came to explaining compound interest, I faced my biggest hurdle. Surprisingly, it was only when I presented the concept of interest through a story that it truly resonated with her.

While she embraced the idea of saving, her school friends seemed to spend money like there was no tomorrow. It was disheartening to see them squander their cash without considering the benefits of saving and letting compound interest work its magic. If you're currently struggling to convince your child about the importance of saving, I hope this account, nearly 30 years later, can provide you with a useful approach to explain the concept in a way that resonates with them.

Compound interest is like a magic power that helps money grow over time. When you save or invest money, you usually earn something called interest. Interest is like a little bonus that you get for keeping your money in a bank or investing it somewhere.

With compound interest, the cool thing is that not only do you earn interest on the money you originally saved or invested, but you also earn interest on the interest you've already earned. It's like a snowball that keeps getting bigger as it rolls down a hill.

Here's an example to help you understand better. Let's say you have $100 and you put it in a savings account that gives you 10% interest every year. At the end of the first year, you would earn $10 in interest. So now you have $110.

But in the second year, you earn interest not only on the $100 you started with but also on the $10 interest you earned in the first year. So you get 10% of $110, which is $11. Now you have $121.

This keeps happening every year. The interest you earn adds up, and the next year you get even more interest because it's calculated on a larger amount. After ten years, your initial $100 can turn into a much bigger amount because of compound interest.

Compound interest is important because it encourages people to save and invest their money. It rewards patience and helps your money grow faster over time. So, if you start saving or investing early and let compound interest work its magic, you can watch your money grow and achieve your financial goals.

So, for the benefit of young savers, remember that saving money is like growing a tree. Be patient, keep adding to your savings, and let the power of compound interest work its magic. It may seem small at first, but with time, it can become something truly amazing. And who knows, maybe one day you'll have a whole forest of money trees!

So, the next time you're tempted to spend all your money, think about the incredible trees you can grow and the fruits they can bear. Start planting your money seeds today, and watch them grow into a forest of financial possibilities.