What is compound interest?

JC Rodriguez
March 05, 2024

Good morning!
We’ve all heard the term “compound interest.” But let’s take some time today to figure out what it actually means.

DEFINITION
What is compound interest?

Compound Interest is like a snowball rolling down a hill, getting bigger and bigger as it picks up more snow along the way. In money terms, it's when you earn interest not just on the original amount you put in, but also on the interest that adds up over time.
For example, let's say you have $100 in a savings account that earns 5% interest per year. After the first year, you'll have $105 because you earned $5 in interest. At the end of the second year, you'll have $110.25. Not only did you earn $5 on the initial $100 deposit, you also earned $0.25 on the $5 in interest, and the snowball keeps growing from there!

Not compound interest also applies to your debt. If you owe $100 with a 5% interest rate. Then at the end of the first year you’ll owe $105. And so on…
Let’s not be on that end of the spectrum. Remove debt from your life, and use compound interest for your gain!

Play around with this compound interest calculator.
- Find out how much your money can grow through the power of compound interest!

Reply to this email with any personal finance question you have, or share with me any wins in your life! (I’ll respond to your questions anonymously in future emails)