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What is Interest and Why Should You Save?

10/24/19

Grandparents and their Grandson smiling while on a boat

“Wow, Grandma! This is awesome!” Sean exclaimed as he toured his grandmother’s new boat.

With delight in his eyes, he admired what he was seeing. It was big. And it was beautiful.

Sean and Grandma sat down on the upholstered bench at the back of the boat and watched the passing waves.

“You know, Grandma,” Sean said after a while, “this must have cost a whole lot of money.”

Grandma laughed. “Well, yes and no,” she said.

“What does that mean?” asked Sean.

“Well, it did cost a lot of money, but because I saved up for it over time it wasn’t so hard. It was just a little bit at a time.”

Sean thought about this. It still sounded tough to save up so much money.

“Plus,” Grandma went on, “my saved money also earned interest, so it took even less time than I expected.”

“Interest?” asked Sean. “What’s interest?”

“Interest,” Grandma said, “which is actually referred to as ‘dividends’ by the credit union, is money that my savings earns while it’s in the account. It’s what helps my savings grow without any extra work on my part.”

“The money earns? For doing what?”

“For doing nothing!” Grandma laughed. “My credit union uses my money to loan money to my fellow membersof the credit union so they can buy cars, homes and cover expenses for many other needs. Then, the credit union pays me some of those earnings since the money in my account allowed them to do that. It’s sort of a reward for saving money. You get it?”

“I’m not sure,” Sean said slowly. “Would this work for me, too? How much money do I need to save in order to earn interest?”

“Not a lot at all,” said Grandma. She sat quietly, looking out into the ocean. “I’ll tell you what,” she said after a minute. “How about I teach you about savings and interest by acting like your credit union?”

“What do you mean?” Sean asked.

“I’ll give you an extra dollar for every $10 you save over the next six months,” said Grandma. “That’s a great interest rate-10 percent! Do we have a deal?”

Sean smiled. This sounded cool. “Deal!” he said.

He was excited for the challenge. How much would he be able to save?

***

At first, saving some of his allowance money was easy for Sean. He put away a little at a time, a dollar here, two dollars there. It was just like Grandma had said she had done when saving up for her boat. This way, it wasn’t too hard for Sean to reach his first $10, and then his second and third. Soon, Sean had $40 saved up in a little glass jar at the edge of his desk.

But then came Sean’s birthday. His parents threw him an awesome Star Wars-themed party and all his friends and relatives came to celebrate along with him. His friends gave him presents, but most of his relatives gave him cash gifts.

When the party was over and everyone had gone home, Sean counted up his birthday money. He had gotten $250 in cash! Sean had never had so much of his own money in his life. He was thrilled! Now he’d be able to buy a few new Wii games, a new football and all the pizza he wanted. This was the best birthday ever!

But then Sean saw the little glass jar on the edge of his desk and the pile of money inside. He remembered Grandma’s boat and all she’d said about earning interest. He had $290 saved up already. With Grandma’s interest, that would be $329! And he would be making all of that money, just for holding onto his birthday money a little bit longer.

There were still five full weeks until the six months would be up and Grandma would pay him the interest he’d earned. But he really wanted to buy something with his birthday money. Could he wait that long?

After thinking about it, Sean decided to buy a new football for $25 and put the rest of his money away until the six months were up. He’d also continue saving as much money as he could.

It wasn’t easy to hold onto that money, but Sean knew it would all be worth it in the end.

And it was. When Grandma came to visit after the six months were up, she asked Sean how much money he’d managed to save. Sean told her he had $270. When Grandma handed over the $27 he’d earned, he knew he had made the right choice.