Teaching Your College Student the Value of Compound Interest

August 2, 2022

As your child prepares for college, there are many things you’ll need to prepare them for – especially finances. Teaching them how to save, budget, and manage their own money for the first time is vital. Plus, if they are able to save some of their money, you can teach them about investing their money early in order to have a solid financial future.

College students don’t typically have a lot of money in their bank accounts, but the sooner they learn about money management, the better off they’ll be when they enter the workforce. It is important to teach them the value of compound interest and how they can begin investing with whatever income they have.

Learn more about when you should start saving for your child’s college education.


Teaching Your Child About Compound Interest

For some people, finance may be a very boring subject. Your teen might roll their eyes when you first bring up investment strategies. Unfortunately, many people learn financial literacy far too late and set themselves up for hardship as they get older. However, if you teach your children the ins and outs of compound interest early, they’ll be eager to start saving now.

Compound interest allows you to more intentionally grow your wealth and better utilize your savings. Instead of earning interest solely on your principal amount, your student can earn interest on what they save and the interest they’ve already earned. 

This is a big incentive for college students to save their money rather than spend it on immediately fun or gratifying options. Saving is a hard lesson for many college students to learn, but by showing them how their money can grow, you can empower them to invest in their financial future. 


Saving and Investment Options for Your College Student

With college expenses and increasing rental property rates, your college student may only have a few hundred dollars at the end of the month to spend. It will be tempting to spend that money on concert tickets or take-out rather than savings. However, saving even a small amount will allow your student to start earning compound interest and grow their money for the future even at a young age. Here are some options we recommend for your college student:

  • A high-yield savings account or Certificate of Deposit – These savings options are lower-risk and can help your child earn through their savings every year. They provide a higher incentive to save than long-term options like investing. 
  • Try an investing app or low-cost broker – Technology has expanded the options for investing to include people of all income levels. Now, you can invest your extra cash at the end of the month on an app, or with a low-cost broker to start earning from the beginning of your financial independence. 
  • Invest in an IRA – It may seem like it’s too early to start thinking about retirement, but the sooner your child starts thinking about it, the better off they’ll be later in life. They can choose between a traditional IRA to save on taxes, (where earnings and gains are not taxed until you take a withdrawal from your IRA) — or a Roth IRA (where you pay taxes on money going into your account) to help them enjoy a comfortable tax-free retirement. 

It’s never too early for your child to start learning about compound interest or other benefits of investing. If you are looking for more guidance to help them prepare for their financial future, visit the OneAscent Resource Center.


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