Both paths start with ten pretend dollars. Principal means the starting amount in this example. Interest is an added payment under the stated rule. Every rate and amount here is pretend.

One rule adds one dollar each pretend year, based on the original ten. This illustrates simple interest. The other adds ten percent of the updated total each year. Ten percent means one tenth. This illustrates compound interest: interest on principal and accumulated interest.

After one year, both totals are eleven. After two, the simple path is twelve and the compound path is twelve dollars and ten cents. After three, they are thirteen and thirteen dollars and thirty-one cents.

The difference comes from the amount used for the next addition. The compound rule includes earlier interest. Trace where the paths first separate. These are calculations under invented rules, not predictions for a real account. A parent can help with the fractional amounts.

Your compound path grew faster under its pretend rule. That tells you about the balance. It does not tell you everything about what the balance could buy.

Purchasing power means what an amount can buy. Suppose a pretend item costs ten dollars at first and fifteen later. A balance that grew from ten to thirteen would be larger, yet it would not buy that item at the later price.

Real account terms also matter. A deposit may earn interest, but not every account must. The game’s ten-percent rule is invented. It is not an offer or a promise of future growth.

An investment and a deposit are different too. A share of a company is not an FDIC-insured deposit. Do not carry a protection rule from one to the other. The wider discovery is to ask which rule made the balance change, which prices you compare and what kind of money holding you are describing.

together · About 10 minutes; estimate

You need

• Paper and pencil

Try it

1. Write two starts: ten pretend dollars each. Label rate ten percent pretend.
2. For the simple path, add one each year: eleven, twelve, thirteen.
3. For the compound path, trace eleven, twelve dollars ten cents, thirteen dollars thirty-one cents.
4. With an adult, label compound additions: one, one dollar ten cents, one dollar twenty-one cents.
5. Choose a fixed addition of one or two dollars per year. Predict whether its three-year total is above or below 13.31, then check.
6. Compare thirteen dollars with a pretend item now costing fifteen. What does the balance alone leave out?