What is compound interest, explained simply?

Concerns & risks

Everyone says compound interest is magic, but every explanation sounds like a math class.

Not understanding it means missing out on growth, or paying more on debt.

Causes & evidence

Compound interest adds interest to your balance, then earns interest on that. See compound interest.

What to do

1. Imagine $100 earning 5% a year: year one you have $105.
2. Year two, the 5% is on $105, not $100.
3. Over many years the growth curve bends upward.
4. Try the free calculator on Investor.gov.

Common mistakes: Common mistakes: waiting to start because the amount seems too small. Time is the biggest helper with compounding. Another mistake is forgetting compounding works against you on debt too. Interest on unpaid credit card balances can grow the same way. Use a free compound interest calculator, like the one on Investor.gov, to see how changes in time and rate affect results.

Speed Man tip: Start early. Time does most of the heavy lifting.

Wrap-up: Interest earns interest. Time is the biggest factor. It works against you on debt too.