Why does my child think $1000 at 5% compound interest is $1100 after 2 years?
Your child adds the same amount each year instead of the same percentage, such as $1000 at 5% compound interest for 2 years as $1100 instead of $1102.50.
Why children do it
Adding 5% of $1000 each year is simple interest, and it's what children usually learn first. Compound interest is worked out on the new amount: $1050 after a year, then 5% of $1050 makes $1102.50. Working a year at a time shows the second year earns more.
How to help at home
Ask them to work it out one year at a time: the second year's 5% is of the new, bigger amount.
The right way
A town of 2000 people grows by 10% a year. How many people will it have after 2 years?
- 2000 × 1.1 × 1.1Growing by 10% multiplies by 1.1, once for each year.
- 2420So 2420 people.
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