How to help teens harness the power of compound interest

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

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.

 

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