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How Money Works

Compound Interest: The Eighth Wonder of the World

Ages 10–14 25 min read Intermediate

Compound interest is supposedly "the eighth wonder of the world." He who understands it, earns it. He who doesn't, pays it.

It's the most powerful force in personal finance. It can build wealth slowly or trap you in debt for decades.

Simple vs Compound

Simple interest: $100 at 10% = $10/year. After 10 years: $200 total.

Compound interest: You pay interest on the interest.

  • Year 1: $110
  • Year 5: $161
  • Year 10: $259
  • Year 20: $673
  • Year 30: $1,745

The Rule of 72

Divide 72 by the interest rate to find doubling time:

  • 6% → 12 years to double
  • 8% → 9 years
  • 18% (credit cards) → 4 years to double

A $5,000 credit card balance at 18% doubles to $10,000 in 4 years with minimum payments.

Working FOR You

A 15-year-old saving $50/month at 7% has ~$213,000 by age 65 — from only $30,000 contributed. Starting at 30 gives only $76,000. Starting 15 years earlier triples the result.

Working AGAINST You

Australian credit cards average 19.94% (RBA, 2023). Payday lenders charge effective rates of 400%+ (ASIC).

Tonight's Question

"Would you rather have $1 million today, or a penny that doubles every day for 30 days?"

The penny becomes $5,368,709. Most people choose the million because our brains can't grasp exponential growth.

The Penny Doubling Challenge

Need: Paper, pencil, calculator.

  1. Day 1 = $0.01. Double it each day for 30 days.
  2. Graph the results — flat for 20 days, then vertical.
  3. When does the penny beat $1 million? (Day 28)

Discuss: where does compound interest work for you? Against you?

Go Further

  • Tool: moneysmart.gov.au compound interest calculator.
  • History: The Medici family built their fortune through banking and compound interest.
  • Book: The Psychology of Money by Morgan Housel (2020), Chapter 4.
  • Question: If inflation is 3% and savings earn 1%, are you losing money by "saving"?

What We Simplified

  • The Einstein quote is probably fake. No verified record exists (see Quote Investigator).
  • Returns aren't guaranteed. Markets can lose 30-50% in a year.
  • Tax reduces compounding in practice.

Sources

  • RBA (2023). "Credit and Charge Card Statistics." RBA
  • ASIC MoneySmart. "Compound Interest Calculator." MoneySmart
  • Housel, M. (2020). The Psychology of Money. Harriman House.
  • ASIC (2019). "Review of Small Amount Credit Contract Laws." Report 600.

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