How compound interest grows
The short answer
Why $1,000 at 7% becomes about $7,612 in 30 years, and why simple interest only reaches $3,100.
0:27Money & mathsBeginnercompound interestsavingexponential growth
Chapters and transcript
- 0:00
Interest earns interest
Put $1,000 away at 7% a year and you have $1,070 after one year. In year two the 7% is paid on $1,070, so you earn $74.90 instead of $70. The extra $4.90 is interest earned on last year’s interest.
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Small at first, then it curves up
Each year adds a little more than the year before. After 10 years the $1,000 has grown to about $1,967. After 30 years it is about $7,612.
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Simple interest stays a straight line
Simple interest pays $70 a year on the original $1,000 only. After 30 years that is $3,100: a straight line instead of a curve.
- 0:21
Time does most of the work
More than half of the growth in this example arrives in the last ten years, from about $3,870 to $7,612. Starting earlier matters more than it first seems.