When trying to teach kids about the value of compound interest – or the time value of money – one possible place to start is with a small number of marshmallows.

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### The 'marshmallow test'

In the late 1960s, Stanford University psychologist, Walter Mischel ran a series of delayed gratification tests on a total of 653 three to five year-olds. One well-known example was the marshmallow test, whereby each preschool child was left alone in a room with one marshmallow and a promise that if they could refrain from eating the sweet until the researcher returned, they would receive another one. The focus of the test was on the ability of the children to exercise restraint, but it could also work as a good lesson in how compound interest works.

### What is compound interest?

‘Compound interest’ simply means earning interest on your savings, and also, eventually, on the interest that those savings earn.

The earlier your child begins to save, the more compound interest they'll earn. An adult example would be, say, \$1,000 to save. Investing that \$1,000 at an interest rate of 4% p.a. means that at the end of year one, you would have \$1,040. During year two, you would be earning interest on a balance of \$1,040 – or in other words, earning interest on both your initial savings plus the interest that those savings have already earned.