4 Ways to teach your child how Interest works

Interest is a fairly complicated concept to explain to a child although forms an important part of their financial education. We have explored ways you might be able to teach your child how interest works and came up with a few ideas you can try.

Reward saving

Encourage your child to save his/her pocket money and as the sum grows reward them with say a certain percentage of interest. Like R1 for every R10 saved. This will encourage them to save even more and teach them that interest isn’t always a bad thing. The more positively they work with their money, the bigger the rewards.

It is important that you explain the concept to the child and allow them to understand what is happening, otherwise the whole exercise is pointless.

Grant a loan and create a payment plan

There’s rarely been a child who hasn’t at least once asked for something before they get their pocket money or something way out of that budget. Offer your child a loan and sit with him/her to discuss a payment plan. However, add a small amount of interest to each payment they have to make and explain to your child that said amount will increase if they neglect making payments every month.

It needn’t be a large amount but only needs to teach your child the concept of making debt and the impact of interest on the debt.

Show them what a real credit card bill looks like

More often than not showing works a lot better than telling so if you have a statement, sit with your child and go through it with him. Explain what each thing means and how it influences the money you have to pay back.

Sit and take an amount and calculate how much interest your child would hypothetically own or receive. Show them how to calculate it and what to look out for.

Give them a credit card

Not a real one of course, but a fake one with a certain small amount of credit they can use every month. However you have to make the repayment arrangement clear and tell your child that if payments aren’t met you are going to add interest and ultimately cut up their card if payments aren’t met.

This will give your child a sense of freedom but also teach them that with said freedom comes a lot of responsibility, responsibility they might just be put off from in the long run.

There are many little tricks you can try to teach your children financial responsibility and terms. The main thing is that you as a parent remain patient and make the terms clear from the start. Stay strict, if you falter on one repayment, then your children will already learn that they can get away with anything.