TL:DR
Raise your hand (virtually) if you learned about compound interest in school! Let's be honest...most of us didn't!
Compound interest has been referred to as the eighth wonder of the world. But what exactly is it and how does it work?
What is Compound Interest?
Okay, imagine you have an account with $100 in it. Let’s say you also get paid a little bit of extra money each year because you’ve kept your $100 in the bank (lucky you!). That extra money is interest, and it’s like a thank-you gift from the bank for letting them hold onto your cash.
Now, here’s the cool part about compound interest: the interest you earn isn’t just on your original $100; it’s also on the interest you earned before. Think of it as a snowball rolling down a hill. At first, it’s small, but as it keeps rolling, it picks up more and more snow. Over time, your snowball gets bigger and bigger — just like how your money grows faster with compound interest.
In simple terms, compound interest is the interest on both the original amount of money (called the "principal") and any interest that has been added to it over time. The longer you leave your money alone, the bigger it gets!
Compound Interest for Kids: Account Explanation
For example, just imagine your original $100.00 investment for your child growing into almost $13,000.00 without you doing anything else!
Here's how it works:
(Assuming a 10% return on your investment):
Year 1 you would earn $10 = $110 total
Year 2 you would earn $11 = $121 total
Year 3 you would earn $12.10 = $133.10 total. And so forth!
Now we used a small number for this example, but imagine how your money could grow as you add larger lump sums of money each day, week, months, & over the years?
This is why the EARLIER you start, the BETTER! AND this is why we strongly urge parents/guardians (yes, YOU) to start your kids early!
Using a Compound Interest Calculator
Whether you are planning to save for your kids' college, wedding, that business venture or first home, the best time to start was yesterday and the second best time is now. But how do you know how much to save for or how much to put aside? This is where a compound interest calculator can come in handy.
A compound interest calculator is a tool that helps you figure out how much money you could earn based on how much you start with, how much you add, and how long you leave it. Here’s how to use one:
Start with the principal (the amount of money you’re putting in): This is your starting balance. Let’s say it’s $100.
Choose the interest rate: The average stock market return of the S&P 500 is about 10% annually — and about 7% when adjusted for inflation. So, let’s say it's 7%.
Choose how much you can contribute per month: Based on your budget, determine how much you would be able to contribute to the same account monthly. To keep it simple, let's keep using $100.
Set the time period: You’ll need to decide how many years you want to keep your money in the account. This will depend on your goals. Saving for your child's college expenses? Wedding? Or down payment on home? Determine your child's age now and how many years until they will need the funds. For this example, let’s say 8 years.
Choose how often the interest is compounded: This refers to how often interest is added to your balance. Most calculators give options like annually (once a year), monthly (every month), or daily (every day). Let’s keep it simple with annually for now.
Once you plug in all the numbers, the calculator will tell you how much money you’ll have at the end of your time period.
For example, using the same numbers as before ($100 initial investment, $100 contributed monthly, 7% interest, 8 years), the compound interest calculator might show you that you’ll end up with about $12,819.88 after 8 years. Not bad, right? (Try it out yourself below)
Compound Interest Calculator: Compound Interest for Kids Accounts Explanation
Can you imagine how your child's portfolio could look when they turn 18? Not to mention that if they hold their investments until retirement age, it could potentially grow into a seven-figure investment. Your child or teen could possibly reach millionaire status in their 20s & 30s (of course depending on how much is contributed and your investments choices) all because of the seeds that YOU planted today!
And the best part is that you can start with ANY dollar amount! This is why investing is for EVERYONE including your kids!
Teaching kids and teens about compound interest is a gift that will keep on giving throughout their lives. By starting early, using relatable examples, and providing hands-on experiences, you can instill a strong understanding of this important financial concept. Emphasize the power of time, regular contributions, and patience, and demonstrate the positive effects of compound interest. By doing so, you equip them with the knowledge and skills they need to make informed financial decisions and secure a more financially stable future.
The best time to start investing for you and your family was yesterday, but the second best time is NOW!
Teach your kids finance, investing, and entrepreneurship: Enroll your students
FINANCIAL EDUCATION & INVESTING FOR KIDS AND TEENS
Enroll your student in our financial literacy course and app here.
If your school or group is looking for a finance curriculum to teach your students about how to manage money, start here to learn more on how to bring KidVestors to your classrooms!
Parents, teach your kids money and make money conversations normal in your household by visiting here.
ความคิดเห็น