Written by Rachel Bennett
Imagine you have a piggy bank, and I give you $100 to put in it. Now, let's say your piggy bank is magical - every year, it adds 10% more money to whatever you have inside.
Year 1: You start with $100. At the end of the year, the piggy bank adds $10 (that's 10% of $100). Now you have $110.
Year 2: Here's where it gets cool! The piggy bank doesn't just add $10 again. Instead, it adds 10% of your NEW total, which is $110. So it adds $11 this time! Now you have $121.
Year 3: Again, it adds 10% of $121, which is $12.10. Now you have $133.10.
See what's happening? Each year, you're earning money not just on your original $100, but also on all the extra money you've already earned! It's like your money is making its own money, and then that money makes more money too.
That's compound interest - your money grows faster and faster over time because you're earning interest on your interest. It's like a snowball rolling down a hill, getting bigger and bigger!
The longer you leave money in a savings account (your real-life magical piggy bank), the more it grows through compound interest. That's why adults are always saying "start saving early!" - because the longer your money has to grow, the more powerful compound interest becomes.
Want to see how much your money could grow? Use our Compound Interest Calculator to play with different amounts and see the magic happen!