Compounding interest is a simple method of putting your money to work for you.
Think of it this way. If you save $100 each month for 10 years, you’d have $12,000. Now what if we add interest to that? Let’s add 7% annually. The same amount, compounded annually would give you $17,308.48 instead, an increase of $5,308.48 or 44.24% more.
So what is compound interest? Let’s explain it using the above to help explain the terms:
- Interest earned on your principal is added to your principal when calculating the next year’s interest
- Interest (7%) earned ($7) on your principal ($100) is added to your principal ($107) when calculating the next year’s interest ($7.49)
A $0.49 cent increase doesn’t seem like much, but let’s scale it up!
| Year | Principal Contribution (Cumulative) | 3% Interest | 10% Interest |
| 2020 | $5,000 | $5,150 | $5,500 |
| 2021 | $10,000 | $10,454.5 | $11,550 |
| 2022 | $15,000 | $15,918.14 | $18,205 |
| 2023 | $20,000 | $21,545.68 | $25,525.05 |
| 2024 | $25,000 | $27,342.05 | $33,578.86 |
| 2025 | $30,000 | $33,312.31 | $42,435.86 |
| 2026 | $35,000 | $39,461.68 | $52,179.44 |
| 2027 | $40,000 | $45,795.53 | $62,894.38 |
| 2028 | $45,000 | $52,319.4 | $74,687.12 |
| 2029 | $50,000 | $59,038.98 | $87,655.84 |
| 2030 | $55,000 | $65,960.15 | $101,921.4 |
Not a bad way to get your money to work for you!
