Compound interest.
In plain English
Compound interest means you earn interest not just on the money you put in, but also on the interest you've already earned. Each year, the pile gets a little bigger, so next year's interest is calculated on a bigger pile. That's the entire trick: small amounts grow into large ones because growth gets layered on top of growth.
01Why it matters
It's one of the biggest reasons starting early can beat starting big. Someone who invests $200/month from age 25 to 35 and then stops often ends up with more by age 65 than someone who invests $200/month from 35 to 65. Time multiplies money in a way that catching up later is hard to match.
02The math, step by step
If you put $5,000 into an investment earning 7% per year and never add another dollar, after 10 years you'd have about $9,836. After 20 years, $19,348. After 30 years, $38,061. The first decade adds about $4,800. The third decade alone adds nearly $19,000. Same starting amount. The math just had more time to layer on itself.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Simple interest is calculated only on the original amount. Compound interest is calculated on the original amount plus all interest earned so far. Most savings accounts, investments, and loans use compounding, not simple interest.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice