PSHE KS3 / KS4: Interest – How does compound interest work?

Teacher’s Notes

Choose from a selection of activities to help students learn about borrowing, saving and interest.

before watching

Questions to get the class thinking and talking…

  • What is interest?
  • When do you earn interest?
  • When do you pay interest?
  • What should you consider before saving or borrowing money?

Establishing “interest” is a charge made for borrowing money or a payment you get when you save money.

Use of the movie

You can watch the film twice: once from cover to cover and once with breaks, to get students’ comments and questions.

When Steph discusses compound interest, you can pause at each step of the calculation. Ask students to take notes.

After having watched

  • Roleplay – Students can take turns playing Steph McGovern (or his secret twin Stefan) and guide the class in calculating compound interest for a different TAP than the one used in the movie. Encourage their classmates to ask Steph or Stefan questions about the steps in the calculation.

Ask, ‘So what’s the difference between simple interest and compound interest?’ Establish that with compound interest, you pay “interest on the interest that has accrued since you started borrowing”, or you are paid “interest on the interest that has accrued since you started saving “.

Activity ideas

  • Compound Challenge – Give students 5 minutes to memorize Steph McGovern’s explanation of compound interest. They’ll find the wording in the video transcript (from “And that’s down to something called compound interest”, to “But that’s hard to calculate, isn’t it?”).

Hide the video transcript and challenge students to repeat Steph’s script from memory. Their classmates can notify them if they are blocked.

Make this challenge trickier by having each student complete a task while reciting: jump on one foot, balance an object, bounce a ball, or keep a ball in the air.

This fun activity helps students repeat key information from the lesson.

  • Glossaries – Students could compile glossaries of financial terms used in the video clip, as well as their own definitions. This encourages them to clarify their understanding of key vocabulary. Terms may include: “interest”, “compound interest”, “interest rate”, “loan” and “APR (annual percentage rate)”.

  • Fee schedules – Ask students, individually or in pairs, to make a table showing the compound interest you would pay if you borrowed £1000 at 12% over 5 years. You could give the class this summary chart…

YEAR AMOUNT APR INTEREST TOTAL
Y1 £1,000 12%
Y2
Y3
Y4
Y5

Students could then calculate the simple interest generated on £1,000 at 12% over 5 years. Ask, ‘What is the difference between the two types of interest?’

  • Bar chart – Students could draw bar charts to illustrate their rate tables. They could represent each loan year as a pair of columns. The first column could show the simple interest generated and the second record the compound interest.

The graph clearly illustrates the cumulative impact of compound interest on the borrower.

  • Shop – Whether you are a borrower or a saver, it pays to shop around and compare offers from banks and building societies. Not all bank accounts pay interest and not all savings accounts offer compound interest.

Students could work in groups to visit an online price comparison website. Can they find the best deal for someone who has £500 to save and the best deal for someone who needs to borrow £500?

  • Borrowing plan – Ask: “Before you borrow money, you need to plan how you will repay it. What would this plan look like? Students might suggest listing their income and expenses, to see what they can afford. allow.

Supported learning and SEN

Students could (with all necessary support) use an online interest rate calculator to explore the interest earned on savings at different APRs.

Closing of the lesson

Students could share the recommendations they got from the shopping task. The class could vote on the best offer for a saver and for a borrower.

Draw students’ attention to the “fine print”, the terms and conditions of the offers they have recommended. Sometimes hidden penalties in these agreements make them less attractive.

If you’re saving or borrowing, you need to check the “fine print” when looking for an offer.

Follow-up task

Have students pick up a flyer on a savings account at their local bank or building society. They should carefully scrutinize the “fine print,” underlining or highlighting penalties that might make that account less appealing.

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