-Guest Post by Jozef Raczka-

Financial Education–Teaching Children About Compound Interest

It’s never too early to start teaching children math through money. Certain subjects, such as
math, can feel more relatable to children by giving them a grounding in recognizable,
tangible real-world concepts. Equally, by connecting it to their learning, it can foster a healthy
understanding and respect for money and the cost of things.
There are multiple different types of interest: simple, accrued and compound but where the
lessons from simple and accrued are perhaps easier to understand, compound interest is a
concept that can really benefit from close study and explanation.

To help with this, here are some tips to get you started teaching kids about compound
interest:

Why should you teach children about finance in general and, specifically, about compound
interest?

Even from an early age, using financial concepts to explain maths is extremely useful. Whilst
teaching children that if something is worth $3.25 and you pay with a $5 note, you’re getting
$1.75 change is great, giving them a grounding in more advanced concepts like compound
interest will push these skills further in accessible, manageable ways.
Compound interest itself teaches about the accumulation of wealth, fractions, percentages,
and moral messages such as the virtues of patience.

How can you explain compound interest to a child through teaching?
The great thing about integrating finances into maths lessons is how naturally and
effectively they can slot in. Even with explaining the difference between compound and
nominal interest rates, you can show how different methods can be used to reach similar
results. Using the two comparative methods also makes each of them easier to understand.
Children will begin to see what compound interest is by understanding what nominal interest
is, and how it differs from compound interest.

How can you explain compound interest to a child through games?
A great way I know of to explain compound interest to children would be using LEGOs. You
can explain how cumulative interest and decimal point percentages work with different sized
bricks; for example, if the child starts with 100 8-dot bricks and are on a 5% interest rate, the
second month they will earn 5 8-dot bricks, the third month they will earn another 5 8-dots
plus the cumulative interest of 5% of the 8-dots which at 1/20th would be a single 2-dot
brick. The very visual nature of LEGO helps children process what’s happening whilst the
familiar nature of it makes it seem like a game and less a study chore.

How can you encourage your child to save money?
The most obvious way is to give children pocket money but explain to them that if they keep
their money in their piggy bank for a month, you’ll add interest to their savings. Showing
them that by delaying their gratification they can increase their rewards can be made
educational, fun, and rewarding.

At what age should you begin teaching children good financial habits?
From when they start Kindergarten, you can begin encouraging children to learn about basic
addition and subtraction through using coins and notes. Good financial habits can evolve as
they get older through learning and play. There is no benefit to limiting a child’s belief that
they can save, invest and make as much money as they want.

What will happen if you give your child good advice on finance?
The most important thing about giving your child good advice on finance is to give them an
awareness and understanding of cost and the virtues of saving. Encouraging them to have a
healthy understanding of and attitude towards money is going to show them that everything
that is purchased has a cost and that nothing should be taken for granted. Putting
something aside for the future instead of buying what you want at the moment isn’t always
much fun – but it’s a vital part of teaching financial responsibility to children.

Jozef Raczka is a Content Executive for the educational publisher, Twinkl.

Thank you Jozef for your guest post today! I feel it can benefit a lot of kids and give good info to their parents and teachers : )

Image by Damir Spanic via Unsplash

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