Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded).
A loan, for example, may have its interest compounded every month: in this case, a loan with $100 principal and 10% interest per month would have a balance of $110 (+$10, 10% of 100) at the end of the first month. At the end of the second month, assuming the same interest rate, it would have a balance of $121 (+$11, 10% of 110).
I've made an illustration of how interest compounding over time can make a huge difference in your investment.
Here is the direct link: Compound Interest Calculator
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Please note that this tool is only a demonstration of how compound interest works. The results in real life will vary depending on:
- How frequent interest is calculated. The tool calculates interest annually.
- ROI at the time of interest calculation.
Please also keep in mind that the value of your investment depends on inflation and currency.
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