Teaching Kids About Compound Interest: Simple Explanations That Work

Albert Einstein allegedly called compound interest "the eighth wonder of the world." Yet most adults don't truly understand it, and very few children are taught about it. This is a shame, because understanding compound interest early can transform a child's financial future.

In this guide, we'll show you how to explain compound interest to kids in ways that are engaging, memorable, and actually fun.

Why Teach Kids About Compound Interest?

Before we dive into the "how," let's understand why this matters:

1. Time is their superpower - Children have decades for money to grow, making compound interest incredibly powerful for them
2. Early habits matter - Understanding how money grows encourages saving and investing from a young age
3. It's genuinely magical - The concept is fascinating when explained well, capturing kids' imagination
4. It's practical - This knowledge will serve them for life, from their first savings account to retirement planning

The Snowball Explanation (Ages 7-10)

The concept: Money growing is like a snowball rolling down a hill.

"Imagine you make a small snowball and roll it down a snowy hill. As it rolls, it picks up more snow and gets bigger. The bigger it gets, the more snow it picks up with each roll. Your money works the same way!

When you save £10 and it earns interest, you might get £1 extra. Now you have £11. Next year, you earn interest on all £11, not just the original £10. The longer you let it roll, the bigger it gets!"

Hands-on activity:

• Use real snowballs if there's snow, or modeling clay if not
• Start with a small ball
• With each "year" (roll down a small slope), add more material
• Show how it grows faster as it gets bigger

The Penny Doubling Game (Ages 10-14)

The concept: Exponential growth through doubling.

"I'm going to offer you two choices:

1. I give you £100 right now
2. I give you 1p today, 2p tomorrow, 4p the next day, 8p the day after, doubling every day for a month

Which would you choose?"

Most kids pick the £100. Then show them this chart:

Day	Amount	Total
Day 1	£0.01	£0.01
Day 5	£0.16	£0.31
Day 10	£5.12	£10.23
Day 15	£163.84	£327.67
Day 20	£5,242.88	£10,485.75
Day 30	£5,368,709.12	£10,737,418.23

The reveal: By day 30, you'd have over £10 million! This dramatically illustrates how growth accelerates over time.

The Magic Seeds Story (Ages 7-10)

The concept: Plant early, harvest more.

"Imagine you have magic seeds. When you plant one seed, it grows into a tree that produces 10 seeds next year. Each of those seeds grows into trees that produce 10 more seeds. Your money is like these magic seeds!"

Visual example:

• Year 1: Plant 1 seed → Get 10 seeds
• Year 2: Plant 10 seeds → Get 100 seeds
• Year 3: Plant 100 seeds → Get 1,000 seeds
• Year 5: You'd have 100,000 seeds!

"This is why parents and grandparents who save money for you when you're young are giving you something really special - they're planting seeds that will become huge trees by the time you're an adult."

Real Money Examples

Example 1: The Birthday Money Challenge

"Let's say your grandparents give you £100 every birthday from age 7 to 18. You have two choices:

Choice A: Spend it each year

• You spend £100 each year
• Total enjoyed: £1,200 over 12 years
• Amount at 18: £0

Choice B: Save and invest it

• You save all £100 each year in an investment that grows by 7% per year
• Total you contributed: £1,200
• Amount at 18: £1,800+
• You have an extra £600 just from compound growth!"

Even better - if you left that £1,800 invested until age 30 without adding anything:

• Amount at 30: £4,600+

The early years of growth helped it more than double again!

Example 2: The £1 Coin Time Machine

"If you could go back in time and invest just £1 when you were born, and it grew by 7% every year, how much would you have when you turn 18?"

The answer: £3.38

"That doesn't sound like much, but remember - that's just £1! Now imagine your parents invested £10 every single month from when you were born:

• Their contributions: £2,160 (£10 × 12 months × 18 years)
• What it becomes: £4,000+
• Extra growth: £1,840

That extra £1,840 is compound interest doing its magic!"

Interactive Activities

Activity 1: The Cookie Compound Interest Game

You'll need: Real cookies or drawings of cookies

The rules:

• Day 1: You have 1 cookie
• Each day, you get 50% more cookies than you had the day before
• You can never eat the cookies (this represents not withdrawing money)

Day by day:

• Day 1: 1 cookie
• Day 2: 1.5 cookies (1 + 50% of 1)
• Day 3: 2.25 cookies
• Day 4: 3.38 cookies
• Day 7: 7.59 cookies
• Day 10: 17.09 cookies

"Look how fast it grows! This is exactly how your savings grow when you leave them invested."

Activity 2: The Squids-In Time Machine

Using our app:

The Squids-In app has a "Time Machine" feature designed specifically for kids. It lets them:

• Input a savings amount
• Move a slider to different ages
• See how their money grows with compound interest
• Compare what different investment choices could become

Why it works: Kids are visual learners. Seeing the numbers grow as they move the slider makes compound interest tangible and exciting.

Age-Appropriate Explanations

Ages 5-7: The "Money Has Babies" Explanation

"When you put money in a savings account, it's like money having babies. If you have £10, it might have a £1 baby after a year. Now you have £11. Next year, all £11 have babies. The more money you have, the more babies it can have!"

Ages 8-12: The Interest Explanation

"Banks pay you interest for keeping money with them. Interest is like a 'thank you' payment. If you save £100 and the bank pays 5% interest, you get £5 after a year.

The cool part? Next year, you earn interest on £105 (your original £100 + the £5 interest). So you get £5.25. The year after, you earn interest on £110.25, and you get even more. It builds on itself!"

Ages 13+: The Mathematical Explanation

"Compound interest means you earn returns on your returns. Here's the formula:

A = P(1 + r)^t

Where:

• A = final amount
• P = starting amount
• r = interest rate
• t = time in years

So if you invest £1,000 at 7% for 10 years: A = £1,000(1.07)^10 = £1,967

You nearly doubled your money just by waiting!"

Common Questions Kids Ask

"Why don't people just invest all their money if it grows?"

Great question! People need money for daily life - food, housing, clothes. But smart people invest the money they don't need right away, so it can grow for the future.

"What if I need the money before it grows a lot?"

That's why it's good to have different types of savings. Some money you keep easy to access for things you want soon. Other money you invest for a long time to get the big compound interest magic.

"Can I lose money?"

If you invest in stocks (like businesses), the value can go up and down in the short term. But over many years, it usually goes up. That's why investing works best for money you won't need for a long time.

"How much should I save?"

A good goal is to save at least some of any money you get - even just 10%. So if you get £10, save £1 and spend £9. That £1 will start growing and working for your future!

Making It Stick

1. Start Their Own Investment

Open a Junior ISA or savings account and show them the balance regularly. Let them see real compound interest happening to their own money.

2. Create a Visual Chart

Make a chart showing how their savings could grow over time. Put it on their wall where they see it daily.

3. Celebrate Growth, Not Just Saving

When checking their account, celebrate the interest earned: "Look! Your money grew by £5 this year without you doing anything!"

4. The 72 Rule

Teach older kids (10+) the Rule of 72: Divide 72 by the interest rate to find how long it takes money to double.

• At 6% interest: 72 ÷ 6 = 12 years to double
• At 8% interest: 72 ÷ 8 = 9 years to double

This makes it easy to calculate growth in their head!

5. Share Your Own Experience

If you have investments or savings, share how compound interest has worked for you. Real examples from someone they trust are powerful.

The Time Value Message

The most important lesson:

"The younger you are when you start saving, the more powerful compound interest becomes. Starting at 10 is better than starting at 20. Starting at 7 is even better!

Time is your superpower. You have something that adults wish they could get back - lots of years for your money to grow. Use that superpower!"

Next Steps

Ready to turn your child into a compound interest expert? Here's your action plan:

1. Choose the right explanation for their age
2. Do one hands-on activity this week
3. Open a Junior ISA or savings account if you haven't already
4. Use visual tools like the Squids-In Time Machine to make it real
5. Review their balance together monthly and celebrate growth
6. Make it a game - can they predict how much it will grow?

Resources

• Squids-In App: Free Time Machine tool that visualizes compound growth for kids
• Future Builder Calculator: See what regular contributions could become
• Our Blog: More articles on teaching kids about money

Conclusion

Teaching kids about compound interest doesn't have to be complicated or boring. With the right analogies (snowballs, magic seeds, money having babies), hands-on activities, and real-life examples, children can grasp this powerful concept.

More importantly, they'll understand why saving matters, not just that they "should" save. When a child understands that their £100 birthday money could become £1,000 by the time they're an adult, saving becomes exciting rather than a chore.

Start the conversation today. Your child's future self will thank you - with compound interest!

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Want to make compound interest come alive for your kids? Try the Squids-In Time Machine - a fun, visual tool that shows children exactly how their money could grow. Download the app or try our web calculator today.