How to Teach Compound Interest Through Business Games to Children

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There are a lot of complex concepts that you need to understand as a business owner. Financial topics tend to be most confusing to many people without a strong background in the area.

If you are trying to coach your child to be a business owner later in life, then you should start early. You should teach your kids about concepts life compound interest. This will help them avoid having a failing business later.

One financial concept that entrepreneurs tend to struggle with the most is compound interest. You can use business games to better understand this concept, which will set your company up for greater success. You can use these games to train your child to better understand the realities of running a business themselves. It will also help them become a successful investor.

Helping Your Child Grasp the Complexities of Compound Interest to Become a Successful Business Owner Later in Life

Mathematical concepts such as compound interest and taxation can be (and are actually meant to be) applied to real life. A nice feature of mathematics – and one that can come in handy for parents – is that it can be taught in a variety of ways. You can either follow the textbook definitions and examples or get creative and create your own examples. Or you can turn to games and make the learning more fun and long lasting for your child. This will help them learn to run a business.

For example, if you want to teach the concept of simple interest to a child, give an example of a person who borrows money from a friend, then explain the borrow-lend relationship between them. Here you can focus on the ‘why’ along with the ‘what’ and the ‘how’. This way, you can turn learning, an otherwise complex concept, into a simple and fun exercise.

Compound interest may be easy for you to understand, but that may not be the case with your child. They require an extensive description of the terms involved in compounding and related concepts, to have a complete understanding. It is one of the most important concepts in finance and also a critical part of secondary education’s curriculum (across boards) in India, which is why it is important to teach it to your child in a way they will understand and retain it.

What better way than trying out some cool business games that also use storytelling?

Here are three different math games that you can play with your child and simplify compound interest on the way.

1. The Marshmallow Game

This is one of the most popular math games, which can simplify compound interest even for pre-secondary students. While not exactly a business game, the give-take relationship involved in compound interesting examples automatically makes it one.

Step 1 – Give a Marshmallow

In the game, you start by giving a marshmallow to your child. If your child has a sweet tooth and loves a specific type of confectionery, go ahead and replace the marshmallow. The key is to use a candy (or any object) that your child loves. (In real life, compound interest applies to money. For the sake of this example, we will stick to marshmallows.

Step 2 – Wait and Give Them One More Marshmallow

Then ask your child to hold on to it for 30 minutes. They may save it in a box or keep it in the refrigerator. Tell them that the challenge is to not eat it and instead save it for the future.

If your child manages to delay gratification for the stipulated time, the next step is to continue the challenge and raise the reward. Give them one more marshmallow and ask them to continue holding on to them.

Step 3 – Explain Compounding

This is the critical step and will explain the crux of compound interest to your child. Tell them that if they manage to hold on to those two marshmallows for 30 minutes, they will get two more. This is the time to explain to them the power of delaying gratification and ‘leaving things for the future’.

By the end of step 3, your child will have four marshmallows. This is your opportunity to explain to them the concept of compound interest: leaving something unused and getting something else (or more) in return over a period of time.

Because they were able to hold on to the marshmallows for an hour, they ended up getting four. If they had eaten the first marshmallow, they would have ended up with none.

If you observe clearly, this simplifies the concept of compound interest like never before. It’s a game that puts your child in the middle of the concept, which will have a more effective impression on them.

Step 4 – Explain Compounding with Numbers

However, learning is not yet done here. You will still need to convert the marshmallows and the rewards in terms of money (principal, interest, interest on interest) to drive the final message home. This will be easier if your child is already familiar with multiplication, division, and percentages.

If they are not, it is recommended that you teach them those first and then move to compound interest. It can be difficult to learn it without knowing the pre-requisites.

2. Let Your Child Build Wealth

This is another fun business game that emphasizes the power of compound interest. Here, instead of using an object like a candy, you directly get to the numbers.

Start by handing out a hundred rupee note to your child. Tell your child that this is the total money that they have at their age (say, 10 years). Based on what they do next and how much they contribute (X), they will have a Y amount of money by the end of Z years.

You are essentially showing a real-life example to your child with the only difference being that your child is taking the shots. Once your child gets a gist of what you are trying to do, ask them to fill appropriate numbers against each element below.

  • Initial investment = 100 (default)
  • Contribution every year = X
  • Time span = Z
  • Rate of interest = A
  • Final Sum = Y

If your child finds it difficult to fill in the numbers (which they may), help them with a range. For example, the rate of interest can be anywhere between 1 and 12. This might be helpful because then you can explain the real-life scenarios better.

The goal of this game is to explain the main elements of compounding. And how a small difference in any of these elements can have a substantial effect in future. Do note that this game uses the basic version of compounding and uses the yearly calculator. While it may not be the right time to explain the different types yet, if your child seems eager, it would be best to touch upon those.

If this business game looks difficult (especially when compared to the first one), you should consider checking out online math games by Cuemath that are easier to play, which does not require much parental guidance. Your child will be able to play them on their own in short sessions of 10 minutes each. They are better than offline games because they use colourful animations and sound effects to catch and extend your child’s attention span. They are a must-try if you have a hard time explaining things to your child or if you yourself are unprepared. Seeking help from such a tool can be very helpful then.

3. The Comparison Game

This is simply an extension of the second business game. Here, you create two examples of investing:

1. A sum of money invested in a fund with simple interest at 10% for 5 years.

2. Same sum of money invested in a fund with compound interest at 10% for 5 years.

Your child will need to be familiar with simple interest to understand this game better. It is basically a comparison game that differentiates simple interest and compound interest.

  • Case 1 – 100 invested at 10% SI for 5 years gives 150
  • Case 2 – 100 invested at 10% CI for 5 years gives 161.05 (yearly compounded)

The small difference of 11.05 should get your child to ask questions about the why and the how. And that’s your cue to explain the individual terms better.

A table with a proper breakdown for each case may further help your child understand the difference between SI and CI year by year. This can be crucial if your child gets confused or does not understand the difference.

Pro Tip – Don’t worry if your child gets confused or asks questions again and again. Compound interest is a tricky topic with some moving parts, so you will have to be patient and considerate.

If your child picks up the difference quickly, you may also teach them advanced techniques involving monthly/semi-annual compounding and real-life instruments (such as the Public Provident Fund) which utilize the concept.

Teaching compound interest to your child in this digital age should not be difficult. While there are these business games that you can play with your child, it is best to start slow and with the basics. It wouldn’t be right to teach them compound interest if they don’t know the concepts of interest, principal, multiplication, and percentages.

This is where Cuemath can help, which calibrates according to the age and grade of a child and prepares math sessions based on these factors. You don’t have to worry about feeding difficult concepts to your child. They will start with basic ones such as multiplication and percentages and then move to bigger concepts like simple interest, compounding, and fundamental taxation.

The key is to be there with your child as they take in information from different sources. This can be confusing to them, so make sure you show the path and clarify any doubts. Start today and start with mathematics.

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About author
Ryan Kh is a big data and analytic expert, marketing digital products on Amazon's Envato. He is not just passionate about latest buzz and tech stuff but in fact he's totally into it. Follow Ryan’s daily posts on Catalyst For Business.