<img src="https://events.xg4ken.com/pixel/v2?tid=KT-N2BAB-3ED&amp;noscript=1" width="1" height="1" style="display:none">
  • There are no suggestions because the search field is empty.

How to Help Teens Harness the Power of Compound Interest

Chris Gottschalk

Chris Gottschalk About The Author

Apr 18, 2023 4:45:00 AM

One of the best parts about raising teenagers is that you can talk with them about more complex topics, like current events or what Taylor Swift concert tickets are really worth. This also applies to financial literacy, and one of the best concepts you can show your teenager is how to use compound interest.

What to Know About Teaching Compound Interest to Teens

Help teens learn compound interest

What is Compound Interest?

Before we can talk about the advantages of compound interest for teenagers, though, we have to talk about just what compound interest is. The simplest explanation is that compound interest is the interest your interest earns.

Here’s how it works. Let’s say you have $30 in an account that pays 2% interest each month, after one month you’ll get paid 2% interest on your $30, which comes to 60 cents. The second month, though, you’ll earn 2% interest on your new total of $30.60, so you’ll get 61 cents. Admittedly, this scale won’t make you a millionaire overnight, but if you constantly contribute to a savings account or investment account with a good interest rate, you’ll be amazed at the results.

Here’s another example. If you were to put $100 away and add an additional $100 to your fund every year for 10 years, you’d end up with $1,300. If you were to put it in an investment account that gives you 5% interest, though, you’ll end up with $1718. That’s $418 that you get just for keeping your money in that account!

How much could you earn on your savings? 

Calculate Savings

Why Teenagers Should Know About Compound Interest

While you might have already known about the power of compound interest, you might still be unsure why compound interest for kids is so important. The reason is that the longer you keep your money in an account that gives you interest, the more your money will earn money. In other words, the earlier you start saving, the more you’ll be able to take advantage of compound interest, and teenagers have time on their side.

When teenagers realize how compound interest works, it can give them a new level of appreciation for why they should save their money. Even if they start saving a little bit at a time, their money will still have more time to grow than if they put that same amount of money away in their twenties or thirties. More importantly, once they get their first career job, they’ll understand the importance of putting money in a 401(k) or other IRA, giving their money decades to grow.

Learning about compound interest will also help teens understand the risks of getting into debt, especially credit card debt. As anyone who has accumulated credit card debt knows, the longer you wait to eradicate your debt, the more you’ll end up paying in addition to the amount you borrowed. Considering some credit cards can have interest rates of 25%, that adds up to a lot.Teach teens compound interest

Tips for Teaching Compound Interest to Teens

So how do you teach teenagers about compound interest? One way is to phrase it in the form of a riddle. Ask your teenager if they’d rather have a penny and double their money for 30 days or have a million dollars immediately? Once you teenager has made their choice, ask why, and then do the math, like this:

  • Day One: $0.01
  • Day Two: $0.02
  • Day Three: $0.04
  • Day Four: $0.08
  • Day Five: $0.16
  • Day Six: $0.32
  • Day Seven: $0.64
  • Day Eight: $1.28
  • Day Nine: $2.56
  • Day Ten: $5.12

Until you get to Day 30, where their penny will have turned into $5,368,709.12, over five times as much as they would get if they’d accepted the million dollars. While there’s no way to double your money every day, at least not legally, this still illustrates the essential concepts of compound interest.

From there, you can show them some more concrete examples of how compound interest works. For instance, you can show your teens an online compound interest calculator, like the one First Alliance Credit Union offers. This will let your teen experiment with different factors in savings, like your initial deposit, rate of interest and number of years you keep your money invested.

You might even want to show your teen how you’ve taken advantage of compound interest. You can show them your investments and how your money has grown over time, focusing on how long it took to get to that point. If your teen has money saved, you can even show them how their money has earned interest by helping them access their account online to see how their money earns money.

Open a youth savings account at First Alliance Credit Union!

Apply Now

Take Advantage of Compound Interest With First Alliance Credit Union

Compound interest is one of the most powerful financial forces in the world today. The sooner your children learn it, the sooner they’ll be able to use it to build up their finances, not to mention have a better understanding of why they should avoid debt.

Once your teenager knows what compound interest is, you can help them take advantage of it by opening a youth account at First Alliance Credit Union. From there, you can help them keep track of how much interest their money earns through First Alliance’s online banking platform or mobile app. You can even show them how to earn more interest on their money by putting their cash in a certificate of deposit or saving up enough to make an initial deposit on a money market account.

We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.