Breaking down big concepts for little people

Last updated on 12th December, 2024 at 12:12 pm

Part 1: The power of interest

Teaching children about money or any financial related topics can be tricky, but it’s also essential for their future. In part one of our new series, we explore how parents can teach kids about all things related to growing money/interest without overwhelming them or complicating it. After all, personal finance is a complicated topic, even for adults.

Reading time: 4 minutes

In this article, you’ll learn:

• What interest is and how to explain it to your kids.
• The impact of compound interest on savings over time.
• Fun activities to teach kids about both the perks and pitfalls of interest.

Understanding interest: Planting the seed of financial knowledge

For kids, interest might seem like a complicated adult topic. But breaking it down into simple metaphors and activities can make it fun and engaging. According to Luxolo Isabelle Dywili, founder and registered counsellor at Lux Counselling, the best way to introduce interest is through relatable analogies.

“Think of interest like planting a seed,” says Dywili. “When you put a seed (your money) in the ground and water it (leave it in your savings account), it grows into a tree that produces fruit. The fruit is like the extra money you earn from interest.”

So, what is compound interest?

Compound interest takes the idea of interest a step further. It’s not just the fruit you see growing but the seeds those fruits leave behind to grow even more trees. In financial terms, this means you earn interest on both your original savings and the interest added to it.

Dywili suggests explaining compound interest with a relatable story. “Imagine a magical piggy bank,” she says, “Every time you put money in, it ‘magically’ adds a little extra cent or rand. Over time, the extra grows larger as it adds more and more to your savings.”

The good and the bad of interest

It’s important to highlight both the benefits and risks of interest.

• When interest is good: It grows your savings, helping you achieve your goals faster. For example, saving R10 each month with 10% annual interest could turn into R22 in a year.
• When interest is bad: Explain how borrowing money can lead to ‘negative fruit.’ Use a relatable example like borrowing crayons: if you don’t return them quickly, you might owe even more crayons later.

Fun ways to teach kids about interest

1. Set up a pretend bank
Create a mini bank at home. Encourage your child to ‘deposit’ coins weekly, and as the ‘bank,’ you can add an extra coin as interest. Use colourful charts to track their growing savings.

2. The magical piggy bank
Introduce a piggy bank that ‘rewards’ your child for leaving coins untouched. Add bonus coins weekly to show compound interest.

3. Storytime with savings
Create stories about a magical tree or a bunny that grows exponentially to spark their imagination while teaching the concept of growth over time.

4. Games and apps
Try apps like Bankaroo, Stash for Kids and Savings Spree that teach financial literacy in a fun, interactive way. Pair this with kid-friendly TikTok videos from financial momfluencers such as Mapalo Makhu and Thando Maguga for relatable tips.

Keep it fun and inspiring

Songs, rhymes, and role-playing games work wonders in keeping kids engaged. Dywili advises parents to create memorable experiences: “Play a ‘banker and saver’ game where children earn bonus money by leaving their savings untouched for a week. These builds understanding while making it enjoyable.”

Building financial literacy from a young age empowers children to make smarter financial choices in the future. With part one of this series, you now have creative ways to teach the power of interest and set your child up for financial success.