Example: $1,000 at 7% a year, compounded yearly. Not a forecast.
Start
$1,000
+$70.00
After year 1
$1,070.00
+$74.90
After year 2
$1,144.90
The extra $4.90 is interest earned on last year's interest.
Interest
earns
interest
Example: $1,000 at 7% a year, compounded yearly. Not a forecast.
$2,000
$4,000
$6,000
0
10
20
30 yrs
$1,967 after 10 years
$7,612 after 30 years
Small
at
first,
then
it
curves
up
Example: $1,000 at 7% a year, compounded yearly. Not a forecast.
$2,000
$4,000
$6,000
0
10
20
30 yrs
Compound $7,612
Simple $3,100
Simple
interest
stays
a
straight
line
Example: $1,000 at 7% a year, compounded yearly. Not a forecast.
+$967
+$1,903
+$3,743
Years 1–10
Years 11–20
Years 21–30
Time
does
most
of
the
work
How
compound
interest
grows