What is Compound Interest? | Compound Interest for Kids |Financial Education for Kids | Kids Finance
An informative resource to help you #talkmoney with your children. Produced in partnership with Castell Wealth Management this video explains compound interest.
Castell Wealth Management are experts in designing and setting up financial strategies and plans so do pop over to https://castellwm.co.uk/ to see how they can help.
What is Compound Interest? | Compound Interest for Kids |Financial Education for Kids | Kids Finance
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Welcome to our video about compound interest for kids! In this video, we'll be explaining what compound interest is and how it works.
Compound interest is the interest that you earn on an investment, such as a savings account or a bond, that is compounded over time. This means that the interest that you earn is added to the principal, or the original amount of money that you invested, and it becomes part of the principal.
For example, let's say that you invest £100 in a savings account with a 5% annual interest rate. After one year, you would earn £5 in interest. But if the interest is compounded annually, then the £5 in interest would be added to the principal, bringing the total amount to £105.
The next year, you would earn interest on the new, larger principal. For example, if the interest rate is still 5%, then you would earn £5.25 in interest the second year (£105 x .05 = £5.25). This process continues each year, so the amount of interest that you earn increases over time.
Compound interest can be a very powerful tool for saving and investing, because it allows you to earn more money over time. However, it's important to be aware that compound interest also works against you if you have debt, such as credit card debt or a mortgage. This is because the interest on your debt is compounded, which means that it can increase over time and make it harder to pay off.
There are a few key terms that you should know when it comes to compound interest:
Principal: This is the original amount of money that you invested or borrowed.
Interest rate: This is the percentage of the principal that you earn or pay in interest.
Compound frequency: This is how often the interest is compounded, such as daily, monthly, or annually. The more often the interest is compounded, the faster it will grow.
Time horizon: This is the length of time that you plan to save or invest. The longer the time horizon, the more time you have for compound interest to work in your favor.
We hope that you've enjoyed learning about compound interest! It's an important concept to understand if you're saving money or investing for the future. Remember, compound interest can work for you or against you, depending on whether you're earning or paying it.
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