Money Foundations for kids –Compound Interest
As a parent, you teach your children to take care of their physical and emotional health. It only makes sense to teach them to take care of their financial health as well. Whether you’re saving or borrowing money, compound interest plays a significant part in your financial health.
Learning about compound interest instills kids with crucial life lessons regarding patience and delayed gratification. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.” Once children understand compound interest, they may be more inclined to save their money, avoid credit card debt and become financially healthy adults.
Some people don’t learn financial literacy until it’s almost too late.
What is Compound Interest?
Compound interest is the interest calculated on the initial principal of a deposit plus the accumulated interest from prior periods on a loan or deposit. It is also known as interest on interest.
Just to illustrate impact of Compound Interest I have detailed hereunder 3 different scenarios wherein the compound interest earned is different.
Amount invested is Rs 1 lacs (one time investment)
| No of Years of Investment | 6% | 10% | 14% |
| 10 | 1.8 lacs | 2.6 lacs | 3.7 lacs |
| 15 | 2.4 lacs | 4.2 lacs | 7.1 lacs |
| 20 | 3.2 lacs | 6.7 lacs | 13.7 lacs |
As one can review – amount earned @ 14% interest rate on CAGR basis is almost 4.3 times more than amount earned @ 6% interest over 20 years of investment.
How to earn @ 14% or @ 12% —-let’s learn to enhance one’s risk profile and ensure asset allocation strategy.
More about various assets and asset allocation strategy in coming week.
