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Money basics

Lesson 18 · Written for kid, teen, and little

Simple vs Compound Interest

Simple interest adds the same amount; compound interest earns on interest too.

The idea

Interest is extra money a bank may add for keeping your savings there. With simple interest, the amount added is always figured on the money you started with, so it is the same every year. With compound interest, the interest you already earned starts earning interest too, so the total can build faster the longer it sits. Rates can change and no account is promised to keep growing, but compounding is a big reason people talk about starting early. 📈

A

Words to know

5

interest

Extra money a bank may add for keeping your savings there. At 5%, $200 earns $10 in a year.

principal

The money you started with before any interest. Put in $200 and the principal is $200, however much it grows.

interest rate

How much interest is added, written as a percent. 5% a year means $5 for every $100.

simple interest

Interest figured only on the money you started with. $100 at 10% simple earns exactly $10 every year, forever.

compound interest

Interest figured on your money plus the interest you already earned. $100 at 10% earns $10 the first year, then $11 the second, because it is charged on $110.

Try it — no accountMatch the pairs

Match each word to what it means.

0 / 4 matched

In the full lesson

  1. 1Match the pairs
  2. 2Put it in order
  3. 3Make the call

Vine has 107 lessons like this one, each written three ways so a 7-year-old and a 17-year-old both get a version that fits.

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