Compound interest is the money the bank pays you on your original deposit and an additional payment on top of the interest you already accrued. It's what we call passive income as your money works for you. The amount you deposit, the bank's rate, and the amount of times the bank pays interest determines how fast your account grows. In simpler terms, the bank pays you interest on top of interest. See example below.
Compound Interest Works Like This
Let's say you put $1,000 in an account that's earning interest compounded annually which can be in stocks, bonds, CD's, savings, or money market accounts. For example, Chase bank decides to give you 10% compounded annually without any monthly contributions by you and a timespan for 4 years. Year 1 you'll earn $100 of interest ($1,000 x 0.10) with a total balance of $1,100. This is where individuals such as myself get confused. Year 2 you would assume another $100 is coming your way but this is the power of compound interest. For Year 2 you will receive +$110 because that interest payment of $100 also gets an increase of 10% interest ($100 x 0.10) and the total balance will be $1,210. The same occurs every year. Still with me? Year 3 payment will be +$121 ($110 x 0.10) with a total balance of $1,331. Year 4 payment will be +$133 ($121 x 0.10) and a final balance of $1,464.10. See video below.
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