What Is Compound Interest?The following is a simple explanation of compound interest and the so called compounding. So lets say that we have a thousand dollars ($1000), which we would like to invest in a bank deposit for 5 years. The bank gives us 10% interest yearly on our money, because they use it for their purposes, as long as we keep the money with them. So this is what happens with the invested money year after year:
Year 1 - After the first year, we should receive 10% on our initial deposit of $1000, which is $100 dollars in interest earning. Now we have $1000 deposit + $100 interest, or our initial deposit has grown to $1100, which is the starting amount for the second year.
Year 2 - After the second year our 10% interest equalls 10% from $1100 or $110. We get $10 more than the interest from the first year, because the interest from the first year itself has earned interest. That's how with our initial deposit of $1000, after the second year we earn $110 or more than 10%
This is the sweetest thing about compound interest: the earned interest earns interest itself!
After years 3,4,5 our interest earnings from the initial depost of $1000 will be:
Y3 - $133
Y4 - $146
Y5 - $161
This is what happens with the deposit year after year:
Albert Einstein called compounding interest "The greatest mathematical discovery of all time!
Amazing! We earn more and more from our initial deposit of $1000 every next year! This is called compounding, or compound interest. After the 10th year we will earn in interests - $1594! Thats great! And this is only from a single investment of $1000. Yes, it is great!Albert Einstein called compounding interest "The greatest mathematical discovery of all time!" an it is!
Do you know what your earnings would be from this initial deposit of $1000 after the 30th year! Believe me, or not, your earnings in interest will be the amazing 16 449 US dollars!
Check it out with our compounding interest calculator, where you can define different periods, initial deposits and compound interest rates!
This is how some of the richest people in the World has made their fortune - Warren Buffet for example!