What is compound interest?Asked on: Sep 12, 2023 06:20 AM
Alright kiddo, imagine you have a magical piggy bank. Every time you put money in it, the piggy bank magically makes more money appear! The more money you put in, the more extra money appears. That's pretty cool, right? This is kind of how compound interest works.
Let's say your mom or dad gives you $10 to put in your magical piggy bank (which is actually a bank account). If your piggy bank has a 'compound interest rate' of 10% per year, at the end of one year you'll have $11. That's your original $10 plus an extra $1 that the piggy bank magically made appear. Now here's where it gets really cool: if you leave all that money ($11) in there for another year, the piggy bank will give you 10% of $11 (which is $1.10), so now you have $12.10. Did you see what happened there? The amount of extra money increased because it was calculated on the new total amount, not just the original amount you put in.
This is why compound interest is often called 'interest on interest'. It can help your savings grow faster over time. So remember to feed your magical piggy bank regularly and let it work its magic!
But remember this trick only works with real banks and not with actual piggy banks...unless yours really is magical!Reference