Grade 6

Elementary

7 min

Lesson 5 of 12

Earning Interest on Savings

Not Started

Discovering how banks pay you for keeping your money in a savings account.

Imagine you put $100 in a box under your bed and come back a year later. It's still$ 100. But what if you put it in a special place and it 'grew' into $105 without you doing any work at all?

Learning Objectives

1.Define interest as a reward for saving money in a bank.
2.Calculate simple interest using the formula $I = P \times r \times t$ .
3.Explain why banks are willing to pay customers to keep money in savings accounts.

What is Interest?

When you put your money into a savings account, you aren't just hiding it away. You are actually letting the bank use your money! As a 'thank you' for letting them use it, the bank pays you a little bit of extra money. This reward is called interest. Think of interest as 'rent' that the bank pays you to borrow your cash. The more money you save, and the longer you leave it there, the more interest you earn. It is one of the best ways to make your money work for you while you sleep!

Quick Check

In your own words, why does a bank give you interest?

Think about it as a 'thank you' gift for saving.

Answer

Interest is a reward or 'rent' the bank pays you for the privilege of using your saved money.

The Bank's Secret: Why They Pay You

You might wonder, 'Why would a bank just give me free money?' It's because banks are businesses. When you deposit your money, the bank takes a portion of it and loans it to other people. Someone might need a loan to buy a new car or start a bakery. The bank charges those people a higher interest rate than what they pay you. They keep some of that money to pay for their building and staff, and they give you a slice of the profit as interest. It's a cycle that helps the whole community grow!

1. You put $100 into your savings account. 2. The bank pays you$ 2 (2% interest) for the year. 3. The bank lends that $100 to a neighbor to fix their roof. 4. The neighbor pays the bank back$ 110 ( $10 interest). 5. The bank keeps$ 8 and gives you your $2 reward.

Quick Check

Does the bank charge a higher interest rate to people borrowing money or pay a higher rate to people saving money?

The bank needs to make money to stay in business!

Answer

The bank charges a higher rate to people borrowing money so they can make a profit.

Calculating Your Reward

To find out exactly how much you will earn, we use the Simple Interest formula. There are three parts: the Principal (

P

) is the money you start with; the Rate (

r

) is the percentage the bank pays (written as a decimal); and Time (

t

) is how many years you save. The formula is:

I = P \times r \times t

To turn a percentage into a decimal, just move the decimal point two places to the left. For example,

5\%

becomes

0.05

Suppose you save $200 in an account with a$ 3\% $interest rate for$ 2 $years. 1. Identify the parts:$ P = 200 $,$ r = 0.03 $,$ t = 2 $. 2. Set up the math:$ I = 200 \times 0.03 \times 2 $. 3. Multiply$ 200 \times 0.03 = 6 $. 4. Multiply$ 6 \times 2 = 12 $. 5. You earned$ 12$ dollars in interest!

What if you only save for 6 months? Since $t$ is measured in years, 6 months is half a year, or $0.5$ . 1. $P =$ 500, $r = 0.04$ ( $4\%$ ), $t = 0.5$ . 2. Formula: $I = 500 \times 0.04 \times 0.5$ . 3. $500 \times 0.04 = 20$ . 4. $20 \times 0.5 = 10$ . 5. You earned $10$ dollars!

Key Takeaways

1Interest is the money a bank pays you for keeping your money in a savings account.
2Banks pay interest because they use your deposits to make loans to other customers.
3The Simple Interest formula is $I = P \times r \times t$ .
4To use the formula, always convert the interest rate percentage into a decimal (e.g., $4\% = 0.04$ ).

Quick Check

Multiple Choice

What is the 'Principal' in a savings account?

Multiple Choice

If you save $100 at a$ 5\% $interest rate for$ 1$ year, how much interest do you earn?

True/False

Banks pay you interest because they want to be kind and give away free money.

What's Next?

Review Tomorrow

Tomorrow morning, try to explain to a family member why a bank is willing to pay you to keep your money there.

Practice Activity

Find a local bank's website and look for their 'Savings Account Interest Rate.' Use that rate to calculate how much interest you would earn if you saved $1,000 for one year.

Browse

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Earning Interest on Savings

Learning Objectives

What is Interest?

The Bank's Secret: Why They Pay You

Calculating Your Reward

Key Takeaways

Quick Check

What's Next?

Earning Interest on Savings

Learning Objectives

What is Interest?

The Bank's Secret: Why They Pay You

Calculating Your Reward

Key Takeaways

Quick Check

What's Next?