How Compound Interest Works
Andrew Answers / 27 Sep 2017 / Personal Finance
What is Compound Interest?
Merriam-Webster defines compound interest as:
Interest computed on the sum of an original principal and accrued interest.
Let’s put that in friendlier terms. Compound interest gives you interest on top of your original investment and additional interest.
Imagine you have $100,000.00.
If you were gaining a 10% annual return, then you would end up with $10,000 added to your original investment. In this case, your end balance would be $110,000 in year one.
In year two, the markets are great, and you are getting a 10% rate of return on $110,000, leaving you with an ending balance of $121,000. You earned $10,000 in year one. You earned $11,000 in year two. In year three, using this same math, you’d earn $12,100.
If you carry that out for 30 years or more, you could be sitting on a very comfortable nest egg.