Compound Interest Explained Like You’re a 10-Year-Old

Have you ever heard of the phrase “time is money”? Well, when it comes to saving money, time can actually make you even more money!

This is because of something called compound interest.

Compound interest is like a magic trick for your money. Let me explain how it works.

Let’s say you have $10 and you put it in the bank. The bank may give you some extra money called “interest” as a way of saying thank you for trusting them with your money. Let’s say the interest rate is 10%. This means that for every year you keep your money in the bank, they will give you an extra 10% of your original $10.

After the first year, you would have $11 – your original $10 plus the 10% interest.

But here’s where it gets interesting. In the second year, you won’t just earn interest on your original $10, you’ll earn interest on the $11 you now have. So instead of just getting $1 in interest, you’ll actually get $1.10. And the more years you keep your money in the bank, the more interest you’ll earn.

This is what’s called compound interest – your interest is compounding, or growing, every year. And the longer you leave your money in the bank, the more it will grow.

Let’s do a quick example to see how much money you could have after a few years.

If you start with $10 and earn 10% interest every year, after one year you’ll have $11. After two years, you’ll have $12.10. After three years, you’ll have $13.31. And after four years, you’ll have $14.64. That’s almost $5 more than you started with just by leaving your money in the bank!

So the lesson here is the earlier you start saving (and investing) your money, the more it will grow over time. Even just a little bit of money can turn into a lot of money over many years thanks to compound interest.

Start saving and investing now and watch your money grow!

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I am not a financial advisor. Before making big money decisions, speak to a certified financial advisor for a tailored financial plan made just for you.