What is compound interest?
Starting young lets the students take advantage of the magic of "compound interest." Compound interest is the interest you earn on interest. This can be illustrated by using basic math: if you have $100 and it earns 5% interest each year, you'll have $105 at the end of the first year. At the end of the second year, you'll have $110.25. Not only did you earn $5 on the initial $100 deposit, you also earned $0.25 on the $5 in interest. While 25 cents may not sound like much at first, it adds up over time. Even if you never add another dime to that account, in 10 years you'll have more than $162 thanks to the power of compound interest, and in 25 years you'll have almost $340
Rule of 72
| The Rule of 72 is a great way to estimate how your investment will grow over time. If you know the interest rate, the Rule of 72 can tell you approximately how long it will take for your investment to double in value. Simply divide the number 72 by your investment’s expected rate of return (interest rate). Assuming an expected rate of return of 9%, your investment will double in value about every 8 years (72 divided by 9 equals 8). |
Suggested student activities
- Develop age appropriate math questions using various interest rates and the Rule of 72.
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Illustration Using Pizza
- Ask students: if a slice of plain pizza costs $2, and you buy a slice every day for a year, you'll spend how much? [The correct answer is $730.]
- If you give up pizza and save the $730 for the year, then invest it, earning 5% interest, after five years, you'll have how much? [The correct answer is $931.69.]
- How much will you have after 30 years? [The correct answer is $3,155.02.]