Lesson 51: What Is Interest?
About This Lesson: This lesson teaches students why understanding interest is essential for making smart financial decisions in real life. Students explore how interest can hurt them when borrowing money, such as financing a car and paying more than the original price, but can also help them build wealth through investing and compound growth over time. Using examples like Warren Buffett, car loans, the S&P 500, and long-term saving, students learn that patience, discipline, and starting early can turn small amounts of money into major financial opportunities.
Lesson Plan & Other Important Documents
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Do Now: Imagine you borrow $100 from a friend, but they say you must pay back $110 next month. Why do you think you have to pay back more than you borrowed? Write 2–3 sentences explaining what interest is and whether it helps or hurts the borrower.
Directions: There are 2 videos below. Be sure to watch them. They will help you fill out the worksheet and get the correct answers on the quiz.
Video 1: What Is Interest?
Outline Of Video 1
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0:00–0:33 — Why students should care about interest
The video opens by explaining that understanding interest matters for real life, not just class. Mr. K explains that if people do not understand interest, it becomes harder to build wealth and easier for banks or lenders to take advantage of them. |
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0:35–1:17 — Warren Buffett and compound interest
Warren Buffett is introduced as an example of someone who understood money early. He describes reading A Thousand Ways to Make a Thousand Dollars and calculating how one penny-weighing machine could earn enough profit to buy more machines, creating a form of compound growth. |
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1:28–1:48 — Buffett’s first jobs
Buffett explains that he wanted more than his childhood allowance, so he started working early. Some of his first jobs included selling Coca-Cola door-to-door, selling gum, selling magazines, and delivering newspapers. |
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1:50–2:37 — Buffett’s work ethic and early money habits
The video notes that Buffett enjoyed business from a young age and was still active at age 92. Buffett also explains that delivering newspapers allowed him to be his own boss, and he delivered about 500 papers a day while earning a penny per paper. |
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2:46–3:24 — Einstein quote and the power of compound interest
Buffett says that Einstein is “reputed” to have called compound interest the eighth wonder of the world. He then introduces the chessboard and wheat story to show how doubling small amounts over time can lead to huge results. |
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3:27–3:58 — Chessboard and wheat story repeated
The video replays the story: a person asks a king to place one grain of wheat on the first square of a chessboard, then double it on each following square. By the 64th square, the amount becomes so large that the king would lose the entire kingdom. |
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4:00–4:09 — Why interest matters
Mr. K explains that understanding interest is important for two major reasons: borrowing money and investing money. |
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4:09–5:30 — Mr. K’s car example
Mr. K describes buying a car around the year 2000. The car cost about $12,000, and he explains three common options: buying, leasing, or financing. He wanted to buy the car but did not have enough money at the time. |
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5:30–6:08 — Financing the car
Mr. K explains that he put $2,000 down and borrowed $10,000. The loan had a 5% interest rate and a five-year repayment period. |
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6:08–7:19 — Calculating the real cost of the car
Using a compound interest calculator, Mr. K shows that borrowing $10,000 at 5% interest over five years becomes $12,762.82. After adding the $2,000 down payment, the real cost of the car becomes $14,762.82. |
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7:19–7:58 — Monthly payments and late fees
Mr. K explains that even though he did not want monthly payments, he still had them. Dividing the loan repayment over 60 months gives a monthly payment of about $212.71. He also warns that late payments can lead to late fees and extra interest. |
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8:00–8:49 — Applying the example to today’s car prices
Mr. K changes the borrowed amount from $10,000 to $25,000 while keeping the loan at five years and 5% interest. The calculator shows that financing a $25,000 car can cost over $31,000, showing how interest makes borrowing more expensive. |
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8:49–10:11 — Interest can work for you through investing
The video shifts from borrowing to investing. Mr. K explains that interest can help people grow money when they invest. He discusses the S&P 500 as a way to diversify because it includes 500 major American companies instead of relying on one individual stock. |
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10:15–11:16 — Saving $10,000 by age 20
Mr. K shows why saving early matters. He enters $10,000 into the calculator for 45 years, from age 20 to age 65, using an estimated average return of 11.82%. The calculator shows the money growing to about $1.525 million without adding more contributions. |
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11:16–11:40 — Growth starts slowly, then speeds up
Mr. K points out that compound growth can feel slow at first, but over time it grows faster. He connects this to the earlier chessboard and wheat story as an example of exponential growth. |
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11:40–12:17 — Adding $200 per month
The video then adds a $200 monthly contribution to the original $10,000 investment. Over 45 years at the same estimated return, the calculator shows the investment growing to about $4.6 million. |
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12:17–13:03 — Final lesson: start early and stay disciplined
Mr. K closes by emphasizing self-discipline, patience, and long-term goals. He explains that investments may go down in some years, but starting early and sticking with a plan gives compound interest time to work. |
