Compound Interest: The Snowball

What your kid learns

• Simple vs compound

  Simple interest is paid only on the money you put in. Compound interest is paid on your money plus the interest it already earned.

• Small at first, big later

  Year 1 looks tiny. But each year adds a bit more than the last. By year 20, the difference is huge.

• A line vs a curve

  On a chart, simple growth is a straight line. Compound growth is a curve that bends up faster and faster.

• Debt snowballs, too

  Compounding works on debt as well. Unpaid interest gets added to what you owe, and then it gets charged interest. Time is the fuel either way.

The story: A line and a snowball

Ravi and Kayla compare simple and compound interest on $100 over 20 pretend years.

1. Helper: Ravi and Kayla each put away a pretend $100, at a pretend 10% a year.
2. Ravi: Mine earns simple interest: $10 every year, only on my $100.
3. Kayla: Mine compounds. Year 1, I earn $10. Year 2, I earn interest on $110.
4. Helper: So Kayla earns $11 in year 2. The interest starts earning interest.
5. Ravi: That’s only $1 more. Big deal.
6. Helper: Now wait 20 years. Ravi has $300. Kayla has about $673.
7. Kayla: A line for Ravi. A curve for me. Time is the fuel!
8. Helper: Interest on interest makes a snowball. And remember: debt can snowball, too.

The game: Snowball hill

Slide the years and watch $100 grow at a pretend steady 7%. Real investments go up and down, and can lose money.

Games use pretend money and work with taps or a keyboard. Nothing is timed.

New words

compound interest

interest paid on your money and on the interest it already earned

simple interest

interest paid only on the money you put in

exponential growth

growth that speeds up over time, like a curve bending up

Questions at the end

• What is compound interest?
• Pretend: $100 at 10% a year, compounding. How much after 2 years?
• On a chart, compound growth looks like…
• How can compounding work against you?
• What makes compound growth bigger?

Remember this

Interest on interest = snowball.

Talk about it

If money could grow on its own, what would you wait 10 years for?

Try it at home: Make a growth table

1. Draw a growth table on paper, with one row for each year.
2. Start with a pretend $100 at a pretend 10%.
3. Fill in years 1 to 5. Where does it speed up?

Draw the growth table on paper. Or play the snowball hill in this lesson again.

School standards

• Grades 6–8
• National Standards for Personal Financial Education: Investing
• Common Core Math 7.RP.A.3
• Common Core Math 8.F.A.3