How do I explain to my child what an interest rate is?

How do I explain to my child what an interest rate is?

Interest rate. The “cost” of money. The price that determines how much a certain amount of money “costs” us for a certain period of time. A concept that is of concern to every adult, throughout their lifetime. A concept that you have encountered many times before you. That’s all well and good. But how do you explain it in simple words to your child? Something tells us that this article will help you!


“Real”, “nominal”, “escalating”. Concepts relating to the notorious ‘interest rate’ and describing its various variations. Concepts rather complicated, even for you, the adult, let alone a child. And yet, sooner or later, we all come across concepts like the above. We all encounter some form of interest at some point in our lives. And we continue to walk along with interest rate, hand in hand, at every stage of our lives.

The purpose of this article is of course not to educate economists, nor to analyze every form and “mechanism” of interest rate. Its purpose is to help you, the parent, explain in simple terms to your child what interest rate means. Read on and learn step-by-step how to do it!


It’s never too early!


By the way, do you remember the first time you heard the word “interest rate”? Maybe it was when you were sitting at the table of the “big boys” and it was time to take charge of your own finances. Or maybe it was earlier, in your childhood, on a summer afternoon when you were casually eating ice cream and happened to hear an adult talking about “interest rates”.

Whatever the case may be, it matters little now. What matters is that, eventually, at some point, you somehow learned what interest rates are and how they work in our financial activities, such as a visit to the bank. In short, you too became a responsible and knowledgeable adult!

However, since then times have changed. Nowadays, you can learn everything from an early age. Nowadays, a child can acquire from an early age what in Woli we call “financial literacy”. And believe us, the benefits are many and significant! So how about having a conversation with your child today about the concept of interest rates?


Too many – and complicated – words are poverty!


The first step to getting your child to understand what interest is, of course, is to talk about it. You understand, however, that your child is neither a banker nor does he or she have the greatest reserve of patience – in other words, “serious” conversations are easily bored. And it makes sense, we might add! So, you should do everything in your power to keep his attention and talk to him in as simple terms as possible, especially if he is quite young in age.

So what does interest rate mean in simple terms?

Interest rate is a number, a simple percentage. A percentage of a sum of money that we have either borrowed from somewhere (from the bank or from our best friend, it makes little difference to your child) or deposited somewhere (in the bank or even in our … piggy bank – hold that last one, there’s a reason!). It’s the rate that determines the famous interest rate, i.e. the amount we “cost” for the money we borrowed or the amount we “earn” for the money we deposited.

If you want, you can describe it to your child in even simpler terms, as follows…


Use simple and everyday examples!


Give your child examples, tangible and everyday! What do we mean?

Here’s an example:

You are watching TV and your child comes to you and asks you to change the channel to watch his favorite show, which lasts, say, half an hour. You agree to “cede” the TV to him for half an hour, but in exchange for it being all yours afterwards. Not just for half an hour, but for 40 full minutes! What is this extra 10 minutes called? For the sake of your discussion, let’s say it’s called … interest!

Now let’s look at an example of the other side of the “coin”…

Let’s say your child is tired of negotiating with you for the remote control and wants to buy his own tablet. He informs you, in fact, that he has already saved up 1/3 of the cost and wants to save up to buy it as soon as possible. What do you do as a super parent who wants to reward your child for his or her spirit of saving? You give him interest on his savings! In other words, you put an interest rate on his savings so that, for example, every time he saves 20 euros, you reward him with another 5 euros in his piggy bank!

Fair, don’t you agree?


Put theory into practice with a “parent rate” on your child’s savings!


And since you agree with the above …time to prove it!

Discover the amazing world of the Woli app together! A fun world full of value and knowledge that makes your child a “star” in money management and brings the whole family together!

Well, inside the Woli app is a real treasure for you and your child, called Woli Money Goals! Through this service, the child saves a portion of their allowance to achieve their goals. What are these goals? They are everything he dreams of acquiring with his allowance, i.e. his own savings incentives!

So, every time your child sets a Money Goal through the Woli app, you have the opportunity to set a “Goal Reward” on their savings! That is, every time your child saves a portion of their allowance to reach their goal, they come out ahead and with … interest!

And he not only comes out ahead “in his pocket”, but also in his confidence! Because in this way, not only will he learn the value of saving and understand what interest rate means in practice, but he will also build some of the most valuable skills for his later life… The invaluable skills that we here call “financial literacy”!

Did you find our article useful?

Discover more useful articles on the Woli blog!