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Understand compound interest in 60 seconds

May 17, 2024

Written by Ariel Teplitsky

Understand compound interest in 60 seconds: Video

Got a minute?

That’s all it takes to learn how to exponentially grow your money, thanks to the magic of compound interest.

So what is it?

Compound interest means you get interest on your interest.

Imagine two savers, Ali and Ellie.

They each have 1,000 dollars in an account that earns 5% interest every year.

After one year, both Ali and Ellie have earned 50 dollars in interest. 

Ali withdraws the interest he’s earned to spend it, while Ellie keeps the interest in her account. 

Year after year, Ali earns another $50 in interest that he takes out and spends – while Ellie’s earnings grow a little faster each year. 

Why? Because she's earning compound interest on both her principal amount and the interest she keeps in the account.

After year 15, Ali pockets another $50 of interest. Ellie earns $99 and keeps on saving it.

(For illustrative purposes only. Assumes no withdrawals or fees. Interest compounded annually.)

After 30 years, Ali’s initial savings of $1,000 has earned him a total of $1,500 in interest. 

But, Ellie has more than doubled Ali's interest in the same period.

Now, imagine Ellie continues to save money regularly. She cuts her takeout coffee habit just once a week and puts the $25 she’s saved into this account every month. Let's suppose her 5% annual interest is calculated, or compounded, monthly.

(For illustrative purposes only. Assumes no withdrawals or fees.)

This is where compound interest gets very ... interesting.

Remember: The longer you let your compound interest grow, the more powerful it becomes. 

So, why not experience the magic of compound interest for yourself?

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