What Is Interest?
Interest is money paid for using or keeping money.
Interest on savings
The exact amount of interest depends on the account and its interest rate.
What banks do with deposits
Banks may pay interest to people who keep money in certain accounts. That's because banks use deposits as part of their banking business, including lending money to customers — not by taking your exact deposited coins and handing them to someone else, but as part of how the whole system works.
Interest rate
An interest rate tells you how much interest is paid or charged. A higher rate means more interest for the same amount of money.
A savings incentive at home
Separately from any bank, one MyKidsMoney family runs its own simple savings incentive on physical savings:
This is a family-made savings incentive, not a bank interest rate. It's just one way this family makes saving feel worthwhile.
The child chooses where it goes
In this family, once the interest is added, the child decides where it goes — and that choice is the whole point. Say they receive $2 of interest:
🛍️ Put it in Spend
They get to use the extra money now.
But it doesn't contribute to future interest.
🐖 Put it in Save
Their savings balance becomes larger.
That larger balance can earn more interest next month — and help them reach their goal faster.
This lets children actually experience the basic idea of compound interest — interest that can go on to earn interest of its own — rather than just being told about it.
What happens if the interest stays in Save
Imagine a child adds $8 to Save every month, and at the end of each month earns $1 interest for every $10 saved — left in Save so it can earn interest too.
By Month 12, $8 a month adds up to $96 contributed — but leaving the interest in Save grows the balance to $178. The gap between the two lines is the interest earning interest.
This is a simplified family teaching exercise designed to demonstrate the concept of compound growth. It is not intended to represent a real bank interest rate.
Interest on borrowing
💰 Saving
The bank may pay you interest for keeping money with them.
🤝 Borrowing
You borrow $100 — you might have to pay back more than $100, because interest is charged.
We'll go much deeper into borrowing later, in Borrowing & Debt.
You've already seen how interest can earn interest of its own — that's called compound interest. Later, in Growing Money, you'll see how the same idea applies to investing over many years.
Work out the new total
You have $20 saved. You receive $2 interest. How much do you have now?
$22.
You have $30 saved. You receive $3 interest. How much do you have now?
$33.
If you'd like, you can demonstrate interest using your child's real savings. The MyKidsMoney family's approach of paying interest on physical savings is just one example of how parents can make saving more engaging — it isn't a suggestion that every parent should pay interest.
Children don't need to understand the mathematics of compound interest to begin understanding the idea. They can see: $10 saved → earns $1 → now $11 → the next interest calculation includes that extra $1. The numbers are small, but the principle is real — which is exactly why a physical Save jar is useful. The child can actually watch the balance grow.
Worth knowing: an interest rate is often quoted as an annual rate — the amount paid or charged over a year. There's saving interest (paid to you) and borrowing interest (charged to you) — two sides of the same idea.
Banks & Digital Money complete!
You've learned how banks work and how money moves electronically:
Now that you understand money, earning, spending, saving, banks and digital money, next up: making a plan for managing money.