What is Compound Interest?

Compound interest can feel a bit tricky, but it’s like a snowball rolling down a hill—it keeps getting bigger and bigger over time! Imagine you have a small snowball at the top of a hill. As it rolls down, it picks up more snow, making it larger. Compound interest works the same way: you earn interest on your initial amount, but then you also earn interest on that interest over time. Here's how it actually works: 1. You start with a certain amount of money, called the principal. Let’s say it’s $100. 2. After the first year, you earn interest on that $100. If the interest rate is 5%, you’ll earn $5, so now you have $105. 3. In the second year, you earn interest not just on the original $100, but on the new total of $105. So now you earn $5.25, making it $110.25. 4. This process continues, and each year, you earn interest on a larger amount. 5. Over time, that can really add up, and before you know it, your money grows much faster than with simple interest, where you only earn interest on the original amount. This is important because it shows how saving and investing early can lead to much more money later on. Even small amounts can grow significantly over time thanks to compound interest. Does that make sense? Want to dive into how to calculate it or see some real-world examples?