Simple vs. Compound Interest
01.Earning Interest on Your Interest
Compound interest is interest calculated on your principal PLUS all the interest you have already earned. It's like your money is having little baby money-children, and then those baby money-children grow up and have their own babies!
02.The Math Difference
Let's use our $100 with 10% interest. In Year 1, you earn $10, so you have $110. In Year 2, compound interest is calculated on $110, not just $100. So you earn 10% of $110, which is $11! Now you have $121. In Year 3, you earn 10% of $121, which is $12.10. Now you have $133.10. Every year, the amount you earn gets bigger!
03.The Snowball Begins
At first, the difference between simple and compound interest looks small (just a few dollars). But if you let it sit for a long time, the gap becomes enormous. Compound interest turns your savings into an engine that feeds itself.