3 ways to explain Interest to children | Mum In The Madhouse

3 ways to explain Interest to children

Do your Children save?  I have learnt that my children each have different money personalities.  One is a saver and the other is a spender! However, as their mum I feel it is really important to teach them about financial management and money and this is how I introduced them to interest.

explain interest

They both get £2 pocket money per week and we have agreed that they can spend 50% and save the other 50%.  Part of learning about saving has been learning why we save and about earning interest on savings and paying interest on credit.

Maxi has been learning about percentages at school, so this has been a natural expansion of this and we have also opened up savings accounts for both the boys.

I have to admit, that even though I try to be  a thrifty mum, sometimes it is hard to explain financial management to children and Interest is particularly tricky to explain.  First off we discussed that according to Wikipedia, it’s been around since the Romans, but it was Richard Witt’s book Arithmeticall Questions, published in 1613, that fully discussed the topic.

Explaining interest

Explaining Interest to Children


Reward savings

By physically rewarding the boys with 10% interest on their savings I have shown them how interest works.  Although this is a MUCH higher interest rate than they would get in a bank, I wanted it to make an impact and be a practical example.

Show, don’t tell

One of the best ways parents can introduce kids to credit cards is to show them a family credit card bill, particularly now that credit card statements show the amount of time it will take to pay the balance off.

Loan from your children

To help children learn that borrowing money is never free borrow from their pocket money and then return it with interest paid.

Wait until your child has a little money saved up. The amount you “borrow” should be relative to what the child has saved. For example, if your child has saved up £20, you might ask to borrow £5.

Keep the money for a couple of days. Then thank your child for lending the money and tell him or her that you are ready to pay it back. When you pay it back, you’ll give the child 10 percent extra. So if you borrowed £5, you’ll pay back £5.50.

At this point, explain to your child that the 50p is what it cost for you to borrow the money.


Explaining interest to kids

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