WHAT IS SIMPLE INTEREST?

There are two types of interest. Simple interest, and compound interest.

A savings account at the bank is usually the first place parents put money away for their children or grandchildren. It's known to be a very "safe" way to save money because there is very little risk in losing it.

We will use the example of a bank account for our purposes here.

Before we go any further, we need to understand what the word "interest" means. Here's a quick definition:

INTEREST IS WHEN YOUR MONEY... MAKES MONEY.

Here is an example of SIMPLE INTEREST:

Let's say you put $100.00 into your savings account on January 1st and you plan on leaving it in there for the next year.

The bank is going to thank you for keeping your money with them by giving you interest (or money) on your money.

(It's a good idea to go to your local bank with your child and ask what the interest rate is on a savings account. Then you can work with that number.)

For our example, we're going to say that they give you 3% interest on your money.

One year later on the same date, January 1st, you'll have $103.00 in your savings account. You will have accumulated $3.00 in interest!

How do we do the math? (get your calculator out and we'll do it together):

$100.00 (your money) x .03 (3 percent) = $3.00
Now, divide $3.00 by 12 (for the 12 months of the year).
That comes to 25 cents per month.

When you update your bank book every month, you will see 25 cents added to your $100.00 every month.

Try using the calculator for different interest rates on your $100.00.
Try 2.25%, or 3.50% or 4.75%.

As you can see, the higher the interest rate, the more money you accumulate.

Once you feel comfortable doing the math, we will move onto compound interest. That's where the fun begins!

WHAT IS COMPOUND INTEREST?