Savings superpower: what interest rate to set for your child in PocketPal

Interest in PocketPal is a demonstration tool

One of the most important things to teach a child about money is that money makes money. Compound interest above all.

Compound interest turns a modest sum into a fortune if you give it enough time. Children have time; it is the one thing they are rich in. There is more on this in “The proven way to become a millionaire”.

How to explain to a child why saving is worth it

A child finds it hard to grasp that spending money “later” beats spending it “now”.¹ Explaining in words that money left alone for a while grows more money lands better with something a child can see.² PocketPal has a tool for exactly that demonstration: interest paid on a child's money, switched on and configured in the account settings.

Where to start in the app

If you have only just begun, give your child a starting amount and call things by their names: this is his first money, and you are his “bank”, paying him interest for keeping it with you. Then open the app together each day and look at two lines: what came in from chores, and what came in from interest.

What rate to set at first

We suggest interest that comes to 20–30% of everything the child receives in a week. Less and it gets lost among chores and gifts. More and your interest starts competing with his reason to earn money himself. This is a rule of thumb from practice; there is no scientific threshold.

An example. A child gets $2 per chore — chores and amounts are configured in the app — and does six chores a week, so $12. His goal: 50 cents a day in interest, $3.50 a week. That is about a quarter of what the child earns from chores. The sums are in dollars for ease of arithmetic; it works in any currency.

rate = daily gain × 365 ÷ balance × 100

On a $32 balance: $0.50 × 365 ÷ 32 × 100 ≈ 570% a year.

No real bank pays 570%. We are not imitating a deposit. We are showing the principle on a small sum: the money was not spent, and there is more of it. For comparison, at 10% a year the same balance pays less than a cent a day, which a child will not notice.

Tell your child up front that the rate is temporary. One way to put it: we are about to press a button, and your money will get a superpower — it will start making money by itself, the way superheroes do. The superpower does not last long and will run out soon. And the more money there is, the stronger it gets.

The child interest rate calculator — put in the weekly earnings and the daily gain you want, and it works out the rate and checks it against the free plan.

Why the rate will have to change

Interest is paid on a growing balance. The gain grows by itself.

In week five the share passes 30% — time to lower the rate. On a balance of $49.38 the same goal already needs 370% a year.

The last row shows what happens if the rate is left alone for nearly six months. Interest pays four times what the child's own work on chores brings in, and working stops being worth it — which is useful for a child to see. But a parent has other aims too: keeping the child motivated to do chores, and building an understanding that money comes from several sources, his own labour among them. It also matters to remember that money in the app is your obligation to your child. If the growth is never stopped, at some point you will not be able to meet it. A broken promise damages trust in adults more than it seems. There is a separate piece on that.

When to remove the high rate

Open the transaction history together with your child, find the “Interest” line and ask: what did you do to get this? The right answer is nothing. But he did not spend that money, and that is the point.

The mechanism has landed and the demonstration is over. The rate can come down now.

By how much is an open question. Formally it can go all the way to an ordinary 10%: on a $131 balance that is 3.6 cents a day. We suggest leaving enough that at the end of a week your child sees a sum that could buy something. Buying it is optional; what matters is that a young child struggles to know what these figures mean at all. A comparison with a thing is understood immediately — that this is the price of a toy he could have every week for nothing, simply by learning to wait.

What if your child wants to keep getting that much

That is excellent news: it means he is engaged. This is the moment to show him a calculation closer to reality — the calculator below works out how much has to be saved for his money to have a superpower at the level he is asking for.

The savings calculator for children — how long a goal takes and how much interest adds to it.

In short

• Look at your child's weekly income and pick a daily gain he will notice. At $12 a week, 50 cents a day. Say straight away that the superpower is temporary.
• Work out the rate in the calculator.
• Look at the result together every day.
• Once your child explains the mechanism himself, the demonstration can be wound down.
• Show him how much has to be saved for the same gain at a rate closer to reality.