What is interest? How do you explain it to your kids?

This blog post is about saving and interest.

Talking to kids about money can be hard, but it’s a life skill they’ll need. Interest is one of the simplest yet most powerful financial concepts to teach—think of it as a magic trick where money grows over time. The earlier kids understand how interest works, the smarter their financial decisions will be.

Interest is the extra money paid or earned when you save or borrow money.

When saving: Interest is the reward the bank gives you for keeping your money with them. The longer you save, the more interest you earn. For example, you put $100 in the bank, and they pay you 5% interest per year. After a year, you’ll have $105.

When borrowing: Interest is the cost of borrowing money. You have to pay back the amount you borrowed plus extra. The longer you take to repay, the more interest you owe. You borrow $100 with a 5% interest rate. After a year, you owe $105.

When borrowing, you’re getting a loan from a bank or lender, but they don’t give it to you for free. Interest is the extra amount they charge you for using their money. The longer you take to repay, the more interest you owe. For example, you borrow $100 with a 5% annual interest rate. After 1 year, you owe $105 ($100 + $5 interest). If you don’t pay it back, after 2 years, you owe $110.25 ($105 + 5% of $105). This is how interest can make a loan more expensive over time.

So, when saving, interest helps you grow your money. When borrowing, interest makes you pay extra for using someone else’s money. Therefore, interest can work for you when saving but against you when borrowing.

Compound Interest: The Gift That Keeps on Giving

Not all interest is created equal. Simple interest is like earning a small allowance every week. It’s predictable. But compound interest? It grows on itself, like a snowball rolling downhill, getting bigger and bigger.

A fun way to explain this is with a ‘magical piggy bank’, one that not only keeps your money safe but also secretly adds extra coins each month. Over time, the bonus coins multiply, making savings grow faster than expected.

The Bright Side & Dark Side of Interest

✅ Good Interest: When your money earns interest in a savings account, it helps you reach your goals faster. For example, if you start with 10 pieces of candy and get 10% more each week, soon you'll have way more candy, without even adding any yourself! The more time you wait, the more candy appears!

❌ Bad Interest: Borrowing money comes at a cost. If you take out a loan, interest works against you, making you pay back more than you borrowed. It’s like borrowing a friend’s toy and having to return two instead of one.

Money Lessons That Stick: Fun Ways to Teach Interest

Play ‘The Bank Game’ – Let your child ‘deposit’ money in a home bank and earn bonus coins as interest each week. Seeing their savings grow makes the concept real!

Game & App Adventures – Try kid-friendly apps like Bankaroo or Savings Spree that make financial literacy fun and interactive.

Small Lessons, Big Impact

Teaching kids about interest now sets them up for financial success in the future. Whether it’s through fun games, stories, or real-life examples, the goal is to make learning about money engaging and memorable.

How do you begin explaining simple & compound interest to your kids

Explain simple interest like this

Imagine you plant a tree that gives you fruit each year. You plant one tree and it gives you 10 apples every year.

After 1 year, you get 10 apples.

In the 2nd year, you get another 10 apples. You’ve gained a total of 20 apples now.

In the 3rd year, you get another 10 apples. You’ve gained a total of 30 apples now.

Each year, you get the same number of apples. That's simple interest.

It looks like this…

Then explain compound interest

Now, imagine you have a special kind of tree. This tree not only gives you apples each year, it grows 1 new branch that gives you 1 apple every year.

In the 1st year, this tree gives you 10 apples.

In the 2nd year, it gives you 10 apples again. And it grows 1 new branch which gives you 1 more apple. So, you now have 10 apples from your tree and 1 apple from your new branch. You gain 11 apples in total.

In the 3rd year, it gives you 10 apples again. And the first branch gives you 1 apple. The tree grows another new branch which also gives you another apple. You now have 10 apples plus 1 apple from the 1st branch and another apple from the 2nd branch. You gain (10+1+1=) 12 apples in total.

This way, you gain more and more apples each year because your tree grows new branches, which give you extra apples each year! That's compound interest.