- Definition
Compound interest is when you earn interest not only on your original money, but also on the interest that has already been added to it. It's like your money earning money on top of its own earnings.
If you have $100 in an account with 10% annual interest, after one year you have $110, and the next year's interest is calculated on that new $110 total.
How to teach this in 30 seconds
Try this analogy: Compound interest is like a small snowball rolling down a hill; it picks up more snow, gets bigger, and then picks up even more snow faster because of its new size.
Ask your child: If your savings earn a reward, what happens when that reward starts earning its own reward?
Common mix-up: Many think interest is only paid on the original amount. With compound interest, you also earn interest on the interest you've already accumulated.
Examples
- A savings account where monthly interest is added to the balance, so next month's interest is calculated on a slightly larger amount.
- Credit card debt grows this way when interest is charged on the original purchase plus any interest you haven't paid off yet.
compound interest is a term used in Ontario’s Kindergarten to Grade 8 curriculum.
Where this shows up
The descriptions on this page are SmartStudy’s own original, plain-language writing — not the Ministry’s wording. They are aligned to the Ontario Curriculum, © King’s Printer for Ontario. For the Ministry’s official wording, see the source link below. SmartStudy is an independent service and is not affiliated with, endorsed by, or sponsored by the Government of Ontario or the Ministry of Education. Ontario Curriculum and Resources ↗
