So what is compound interest? Compound interest is interest that grows in your account with not only the initial amount invested, but the added interest as well. This may not seem like that big of a deal, but as you will see below it grows very quickly. Let's say for example you have a bank account that will pay 10% interest compounded annually. So on year one you start with $100 at the end of the year you will have earned a total of 10% in addition to the principal. In total for just leaving your money in the account you will have accumulated $110 dollars. Year two comes and goes and by the end of the year you will have accumulated $121. Take a look at the chart to see just how quickly it adds up.
As you can see compound interest is a very beneficial thing to have time and money on your side. With interest rates currently only at around 1% for most savings accounts limits the effectiveness of saving money only in a savings account.
Albert Einstein called compound interest the 8th wonder of the world.
In your typical interest bearing savings account the entire 10% is not distributed at a single time, it typically is distributed on a monthly basis to where it equals 10% at the end of the year. So although the results are the same if you were to look at your account at any given time the numbers would not be as clean as our example above has shown.
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