What is Compound Interest?

 

Howdy Wall Street Willy. I have a really big question for you. What is compound interest?

Compound interest is interest on interest.

What do you mean by interest on interest?

If you have $100 in the bank and has 10% rate of interest, on the first year, it’ll be $10 in interest because 10% of $100 is $10. But in the second year, the interest will be $11 because the interest for a $100 is $10, and for the extra $10 is another $1. So the total is $11 for the second year, but only $10 for the first year.

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Well, but why is that even important? It’s just interest on interest on interest. Who cares?

Well, it shows that the longer you invest your money for, the quicker your money grows and its growth gets accelerated. And you can make a lot of money with compound interest.

Well then, I really like compound interest. But could you give me a long term example?

Okay. If there’s $100 at a 10% rate of interest, in 10 years it’ll turn into $259. In 20 years, I’ll turn into $673. In 30 years, it’ll turn into $1,745. In 40 years, it’ll turn into $4,526. And in 50 years, it’ll turn into $11,739!!

$100 at a 10% rate of interest

  • 10 years: $259
  • 20 years: $673
  • 30 years: $1,745
  • 40 years: $4,526
  • 50 years: $11,739

Whoa! That’s so awesome! A $100 at a 10% rate of interest can turn into $11,739. That’s so awesome!!

Yes, it is very awesome. That is why compound interest is very important.

Does my bank account give compound interest?

If you leave the interest that you got in your bank account, then yes, you would receive compound interest.

That’s great! But does my piggy bank give compound interest?

No, it does not even give interest – unless your parents secretly sneak money into it!

Thank you very much for teaching me about compound interest, Wall Street Willy.

You’re welcome. Remember, finance is your friend!

Podcast: What is Compound Interest?

Compound Interest
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