How Compound Interest Works
Compound interest means you earn interest not only on your original money but also on the interest that money has already earned.
It's often said that compound interest makes money double on a set schedule—in fact, there is no universal timetable, because the result depends on the interest rate and the account's terms.
Understanding compound interest is key to growing savings and investments over time, making it a powerful tool for building wealth and planning for the future.
It's like planting a tree that grows fruit, and then the fruit grows more trees that also grow fruit, so your garden keeps getting bigger all by itself.
Compound interest shapes everyday choices about saving, investing, borrowing, and how long you leave money alone. Knowing what makes it grow helps you compare options and make time work harder for you.
Say you place $100 in an account earning a hypothetical 10% interest each year. After year one, you have $110; in year two, the 10% applies to $110, adding $11 and bringing the total to $121.
Time gives growth room
The longer money stays invested or saved, the more chances its earnings have to earn additional interest.
More frequent adding can help
Regularly putting extra money into an account gives more money the chance to start earning interest sooner.
Debt can compound too
When interest builds up on money you owe, a balance can grow over time unless you pay it down.