Kids hear about money constantly — from the price of groceries to the cost of a new video game. But very few children learn how money actually grows. Interest is one of the most important financial concepts anyone can understand, and the earlier a child grasps it, the stronger their money habits will be for life.
What is interest?
Interest is the price of borrowing money, or the reward for saving it. When you put money in a savings or interest-earning account, the bank uses that money to lend to other people. In return, the bank pays you a small amount — that payment is interest.
Here is a simple way to explain it to a child: imagine lending your favourite toy to a friend for a week. When they return it, they give you your toy back plus an extra toy as a thank-you. That extra toy is like interest — it is the reward you earn for letting someone else use something that belongs to you.
The same idea works with money. If you save $100 at a bank, the bank pays you extra money for the privilege of holding onto yours.
How simple interest works
Simple interest is the most basic version. It’s calculated on the original amount you saved — and only that amount — every single time.
For example, if you save $100 and earn 3% simple interest per year, you earn $3 each year. After one year, you have $103. After two years, $106. After three years, $109. The amount you earn never changes because it is always calculated on the original $100.
Simple interest is straightforward, which makes it a great starting point for kids. But most savings accounts actually use something slightly different — compound interest.
A worked example your child can follow
Compound interest means you earn interest on your original savings and on the interest you have already earned. Each year, the amount grows a little faster because last year's interest gets added to the total before new interest is calculated.
Here is what happens when you save $100 at 3% annual compound interest over 5 years:
Year | Starting balance | Interest earned | Ending balance |
|---|---|---|---|
| 0 | — | — | $100.00 |
| 1 | $100.00 | $3.00 | $103.00 |
| 2 | $103.00 | $3.09 | $106.09 |
| 3 | $106.09 | $3.18 | $109.27 |
| 4 | $109.27 | $3.28 | $112.55 |
| 5 | $112.55 | $3.38 | $115.93 |
Notice that the interest earned increases every year. In Year one, you earn $3.00. By Year five, you earn $3.38. The difference may look small, but each year you are earning interest on your interest — and over time, that effect accelerates.
This is the concept that makes compound interest so powerful. Your money is not sitting still; it is quietly growing on its own.
Simple interest vs compound interest
With simple interest, $100 at 3% earns exactly $3 every year, no matter what. After five years, you have $115.
With compound interest, that same $100 at 3% grows to $115.93. The difference after five years is less than a dollar — but the gap widens dramatically over longer periods.
After 20 years at 3%, simple interest gives you $160. Compound interest gives you about $180.61. After 40 years, simple interest produces $220, while compound interest produces roughly $326.20 — more than tripling the original amount. The longer money sits, the harder compound interest works.
Most savings accounts use compound interest, which means your savings grow faster the longer you leave them untouched.
Why starting early matters
Time is the most powerful ingredient in compound interest. The earlier you start saving, the more time your money has to grow — and the more dramatic the results.
Consider this example. If a child saves $100 at age 10 and leaves it in an account earning 5% compound interest, by age 30 that $100 has grown to about $265. But if the same child waits until age 20 to save that $100, by age 30 it is worth only about $163.
Starting 10 years earlier more than doubles the growth — even though no extra money was added. That is the power of time combined with compound interest.
This is why financial literacy at a young age matters so much. A child who understands that saving early gives their money more time to grow is a child who will make stronger financial decisions as an adult. You do not need large amounts — even small savings benefit enormously from an early start.
How to bring interest to life at home
Understanding interest becomes much easier when children can see it in action. The goal is to move the concept from abstract to tangible. Here are a few practical ways to make it real.
Pay "interest" on allowance savings. If your child receives an allowance, offer to pay 5% per month on whatever they choose not to spend. At the end of each month, calculate the interest together and add it to their savings. They will quickly see how leaving money untouched makes it grow.
Open a savings account together. Visit a bank or set up an account online and make a small deposit together. Check the balance each month and talk about the interest earned. Even a few cents of interest can spark a meaningful conversation about how money grows.
Use a jar system with built-in interest. Set up three jars — spend, save, and give. Each week, add a small "interest" payment to the save jar based on what is inside. This makes the concept tangible and visual, which is especially effective for younger children.
Explore a compound interest calculator. Sit down together and try an online compound interest calculator. Let your child enter different amounts, interest rates, and time periods to see how the numbers change. Watching the graph curve upward over 20 or 30 years can be a powerful moment.