Compound interest accounts: 5 pros of saving and investing

To kids, saving money might not sound as thrilling as their next soccer game ⚽ or a best friend's upcoming birthday party. However, money helps buy the things kids want, and having cash saved for their future needs can be reassuring.

You can encourage your kids to put their money to work in a compound interest-bearing account. Every cent they save will earn interest, which they can think of as a small reward for their good savings habits. 

How does compound interest work?

Compound interest allows you to earn money on your account balance continuously. Instead of relying solely on deposits to increase your savings, financial institutions provide you with interest, too. Your bank will periodically deposit the interest you earn into your account, which builds its value. 

The higher your account's annual percentage yield (APY), the more interest you will earn over the compounding periods. 

So, consider two kids with savings accounts. One account earns interest at the October 2023 average national rate of 0.46%. Another kid has a Greenlight® money account with 5% interest.* Who do you think earns more in savings? The Greenlight kid, of course!

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Different types of compound interest accounts

Accounts that earn compound interest include high-yield savings, money market accounts, and certificates of deposit (CDs).

High-yield compound interest accounts offer higher annual interest rates than traditional savings accounts. It's possible to find a high-yield savings account that earns 4% or more on an initial deposit and future savings.

Money market accounts combine features of checking and savings accounts. They may come with a debit card, which you can use to withdraw money at an ATM or make a purchase at a store 🏧. However, a money market account's interest rate is usually lower than a high-yield savings account.

A CD requires an original deposit for a set amount of money for a specific period, such as one year. During the CD's term, you can't withdraw the principal balance without incurring a fee or penalty. However, your initial investment will earn interest at a rate the financial institution sets. Some CDs require a minimum balance to open.

5 benefits of opening compound interest accounts for kids

Opening a compound interest account makes cents 😉 for kids. Here's why.

1. Kids build a strong financial foundation

Eventually, kids will become adults. And when they do, they’ll need to manage their own finances. That means establishing a budget, paying bills, and saving for retirement. Opening a compound interest account allows kids to learn some of the basic principles of personal finance, such as building savings and learning how interest works.

The knowledge kids accumulate from their childhood savings experience will stick with them for life. They’ll see how they can earn money on the money they save. Plus, if kids get in the habit of putting aside a percentage of their allowance in savings, they can apply the same practice to their future paychecks. 💰

2. Teach patience and delayed gratification

The earnings from compound interest don't happen overnight. Instead, they grow over a period of time. The longer kids allow their money to sit — and the more they deposit into their account — the more interest they will receive. 📈

While kids won't see a huge difference from one day to another, they'll reap the rewards over time. It's a valuable lesson teaching the virtues of patience. Thinking about what they can use their savings for in the future can help them stick with their savings plan. And seeing interest earnings deposited into their account will reinforce the lesson! 🎓

3. Help them develop smart saving habits and financial goals

Kids are always learning something new. They learn to ride a bike, make friends, and how to add and subtract. Learning to save is another concept that can benefit them — for life! While kids may forget some of the lessons they learn in childhood, saving will stick with them forever. 

When kids learn to save, they can set specific future goals for the money they stash away. Say your teen has your eye on a new pair of headphones, but they're $50. By saving $5 weekly, they could have the headphones they want in five weeks. And if they earn interest on their savings, they’ll reach their goals even faster!

4. Boost their interest earnings with a high-yield interest account

Traditional savings accounts offer interest, but a high-yield interest account steps things up quite a bit. That makes it easier to reach your goals, whatever they might be. 🫰

Greenlight offers up to 5% interest on savings.* Your kids and teens get rewarded for every dollar they save, and they’ll see the results as your balance grows. Plus, since interest compounds, they will earn more money when they let their cash sit rather than spend it. 

You can also sign up for Greenlight's Parent-Paid Interest program, which allows you to set an interest rate on your kid's savings that is paid directly from your account. With your help, they'll learn the value of savings and see the fruits of their efforts. 

5. Build a future and set them up for long-term success

The earlier your kid starts saving, the more time their money has to build value. In fact, there's no better time to start saving than today. If you wait, time passes, and the opportunity to earn interest goes with it. 

Think about what your kid might need five or 10 years from today. Maybe they will be driving by then, and buying a car is a possibility. 🚗 If your kid starts saving for a car now, they'll have years to grow their savings, making it easier to afford a vehicle when the time comes. 

Teens who don't withdraw their savings before turning 18 can use it in adulthood. They will have time to accumulate a nest egg for their future. 

Help your kids discover the power of compound interest

Teaching kids how compound interest works now — when they're young and new to the world of personal finance — demonstrates a fundamental principle to building wealth. You can bolster the lesson with a real-world tool, such as Greenlight's 5% Savings Reward* or investment account options. Your kids will see their money grow in real time, helping them to understand the benefits of savings. Explore Greenlight's investing app for kids and supercharge their savings today! 

*Greenlight + Invest families can earn monthly rewards of 1% per annum, Greenlight Core and Greenlight Select families can earn 2% per annum, Greenlight Max families can earn 3% per annum, and Greenlight Infinity families can earn 5% per annum on an average daily savings balance of up to $5,000 per family. Only Greenlight Max and Infinity families can earn 1% cash back on spending monthly. To qualify, the Primary Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.