Principal
Age 10+The original amount of money you saved or borrowed, before interest was added.
At a glance
Principal is the original amount of money — the part that's "yours" before any interest enters the picture. On a savings account, principal is what you deposited. On a loan, principal is what you borrowed. Every savings calculation and every loan calculation references principal as the starting number; interest is everything that happens on top.
Example sentence
"Your principal is $100. After a year at 5% interest, you have $105."
Why this matters for kids
Principal and interest are the two halves of every savings and loan calculation, and a kid who knows the word "principal" can read their own future mortgage or car loan statement without help. The literacy here is bigger than it sounds. Every loan statement shows principal balance vs total balance, principal paid vs interest paid, monthly principal payment vs monthly interest payment — and the ratio between those numbers determines how fast a debt actually shrinks. Most adults look at their mortgage statement and see "I paid $2,500 this month" without realising that only $400 of it went to actually reducing what they owe. That detail — that early loan payments are mostly interest, late ones are mostly principal — is the foundation for understanding why paying extra principal early on a mortgage saves enormous amounts over the life of the loan. Plant the word principal in a kid's vocabulary at age ten and they'll be ten years ahead of most adults on these conversations.
How to teach it
When you pay interest on their savings, announce it as "principal + interest": "you had $40 principal, plus $2 interest, that's $42 total now." Repeat the structure every interest cycle. Eventually they'll stop hearing "$42" and start hearing "$40 + $2," which is exactly the mental model they'll need for their first mortgage. For older kids, walk through one of your real loan or savings statements (redacted if you prefer). Point at the principal column. Point at the interest column. Note how the ratio shifts over time — early in a mortgage the interest portion dominates; late in a mortgage the principal portion does. That single visual is most of what kids need to understand about loan amortisation. For teens, introduce the strategy of paying extra principal: even a small extra payment toward principal each month dramatically reduces the total interest paid over a 30-year mortgage.
Common misconceptions
- Principal and total balance are the same. They're the same right when you take out a loan or open an account, but quickly diverge as interest accrues.
- You can pay either principal or interest in a loan payment, your choice. Standard payments split based on the amortisation schedule. To pay extra principal you usually have to specify it explicitly.
- Principal only matters on loans. It matters equally on savings — it's the foundation that interest builds on.
Related terms
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