ELI5: compound-interest

// eli5

What is compound interest?

Compound interest is when your money grows faster and faster because you earn interest on the interest itself [3][4]. It's like planting a seed that grows into a tree, and then that tree grows more trees, which grow even more trees.

Why does it happen?

When you save money in a bank, the bank pays you interest as a reward [4]. Instead of taking that interest out, if you leave it in the account, your next interest payment gets calculated on your original money PLUS all the interest you already earned [3].

What does it feel like?

Imagine you have $100 and earn $5 each year (5% interest) [4]. Next year, you don't earn interest on just $100 anymore—you earn it on $105, getting $5.25. The year after that, you earn it on $110.25, and so on. Your money keeps growing faster without you doing anything [3][4].

How do you fix it?

You don't need to "fix" it—it's actually amazing for saving! Just put your money in a savings account and leave it alone to grow [1][4]. The longer you wait and the higher your interest rate, the bigger your pile of money becomes.