Compound Interest

The interest you receive on interest you have already earned.

Example

Suppose you invest $1,000 in a security that offers 10% interest compounded annualy. After one year you would have 10% more money in that account, or $1,100.

Now, suppose you were to leave that $1,100 in that account for another year. This is where you see the power of compounding. After the end of year two, you would earn 10% on $1,100 (and not just on the original $1,000), or $1,210. Specifically, your original $1,000 earned $100 and the $100 you earned after the first year got you another $10. The interest you earned is now making you money!

Fun Fact

Money that is invested at 10% interest compounded annually will double in value in about every 7 years.

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