To The Moon

Teach your child about Saving and Interest

Interest is a very simple way for your child (or anyone for that matter) to make money without them having to work for it. 

Start by explaining what interest is. It's the reward banks pay for depositing money into a Savings account (lending them money). 

Then explain the difference between Checking (Everyday) accounts and Savings accounts. Checking accounts don’t typically pay interest. Savings accounts do but the interest paid will generally be less if money is withdrawn or there hasn’t been another deposit made within a certain period of time (usually a month).

Open up a Savings Account on their behalf (if they are under 18). The world has been in a low interest rate environment since the global financial crisis in 2008, so returns on bank deposits have been relatively low, but even an interest rate of 0.5% is better than nothing and with surging inflation, the tide has turned and interest rates will inevitably rise over the coming months.

Get them to search banks online to discover what interest they are paying on Checking and Savings accounts.

Establish a Savings Goal

It can be as simple as identifying something they’d like to save up for and then working out how much of their allowance each week they want to put in their savings account for it. Once they’ve saved enough money to meet their goal, check whether they’d like to use it or keep saving for something more meaningful or valuable.

For children 10 years or older you can introduce simple and compound interest and explain that the ability to earn interest on the principal and previous interest makes a big difference to the interest paid. The longer the period invested and the higher the interest rate, the bigger the difference. The sooner they start saving, the sooner their interest will start compounding.  

Use Online Calculators

These are easy to find online and easy to use. See if your child can find a savings calculator online that tells them how much they can achieve by saving and how quickly they can reach their goals.

A good learning activity is to get your child to pretend they have just been given $1,000 by their grandmother on the condition they bank it for one year. Get them to research which bank will give them the most money by the end of the year in a Savings account.

For older teens, you can use the same exercises to get them to explore the cost of buying a house. Get them to search on a real estate website and select a house. Ask them to calculate how much is required for a 20% deposit and work out how long it will take them to save this amount using an online savings calculator. 

To summarise:

Explain what interest is and the difference between Checking (Everyday) accounts and Savings accounts. 

Open up a Savings Account on their behalf (if they are under 18)

Get them to create a savings goal

Explain the benefits of compound interest and starting to save early

If you don’t have the time or inclination to do this, our gamified online program for 10-14 year olds does it for you: www.moneytimekids.com/for-parents

Keep an eye out for # 3 in this series shortly.