Simple ways to explain the power of compounding to your child

power of compounding

Welcome to the exciting world of banking for children! Let’s delve into the concept of compounding and how it can work wonders for your child’s bank account. Understanding this powerful concept can help your little one develop healthy saving habits that reap long-term benefits.

What is compounding?

Here’s how you can explain the meaning of compounding to your child:

Imagine that you have some money saved up in your piggy bank. When you break it open, you will end up with only the money you have saved and nothing more.

But if you had saved the same amount in a savings account, you would have earned interest on that money. And if you kept your money saved in the bank for long enough, your interest would also earn interest. This method of earning interest on your principal amount as well as on the returns earned is called compounding.

Compounding is when you earn interest on the money you have saved, and then you earn interest on the interest you have earned. This makes your money grow faster over time!

The power of starting early

Another point to make your children understand about compounding is the role of time.

Did you know that the earlier you start saving, the better the results can be? Starting early gives you a superpower in the world of compounding. Even if you save just a small amount regularly, your money will have more time to grow and multiply.

Let’s do the math

Showing them the power of compounding through this simple math can be helpful:

Let’s say you deposit Rs 10,000 in a savings account that pays 5% interest annually. After the first year, your account balance would be Rs 10,500, including the Rs 500 you earned in interest. If you leave that money in the account and earn the same interest rate for the next year, you will earn interest on the new balance of Rs 10,500, which would be Rs. 525. This would bring your account balance to Rs 11,025 at the end of the second year.

Let’s say you leave that money in the account for 10 years instead of just two years. After 10 years, your account balance would be Rs 16,386, including Rs 6,386 in interest earned over the 10-year period. That’s an extra Rs 1,386 in interest earned just by leaving your money in the account to compound over a longer period of time.

Start saving your money in a bank account

Finally, helping your children connect their future goals to saving money is essential.

Think about your dreams for the future. Do you want to become a doctor, an engineer, or even an astronaut? Saving for big dreams like education can be made easier with compounding. Starting early and consistently saving in your children’s bank account will make you one step closer to turning those dreams into reality.

Once you have a bank account, you can start saving money. The more money you save, the more interest you earn over time. You can deposit money into the account whenever you get some pocket money or receive gifts from family members.

To wrap up

The power of compounding is a simple concept that can help your child’s money grow significantly over time. By opening a children’s bank account for your child, you can help them save regularly and watch their money grow. Remember, the longer they keep the money in the bank account, the more interest they will earn.