Compound interest in one minute
Compound interest means the returns keep earning too. US$10,000 at 7 % a year, credited once a year, grows to US$76,122.55 in 30 years. The formula is end value = start × (1 + rate) to the power of the years, so 10,000 × 1.07^30.
With simple interest, where only the first US$10,000 earns anything, it would be 10,000 × (1 + 0.07 × 30) = US$31,000.00. Nobody paid in the difference of US$45,122.55. It appears because every year works on a larger sum.
With compound interest every year works on a larger sum. That is why the time counts for more than any single amount.
US$10,000 at 7 % a year becomes US$76,122.55 in 30 years. With simple interest it would be US$31,000.00.
Arithmetic only, no data series behind it.
Questions people ask
What does compound interest mean in plain words?
Interest that is added to the sum and then earns interest itself. Every year therefore works on a slightly larger amount than the year before.
How do you work out compound interest?
End value equals start times (1 + rate) to the power of the years. With interest credited once a year that is exactly the sum the simulation works.
What is the difference from simple interest?
With simple interest only the first amount earns anything, so it grows by the same sum every year. With compound interest the yearly gain grows with it.
One starting amount, with compound and with simple interest, side by side over the years.
The simulation, the comparison and the Beam stay free.
Education, not advice. Disclaimer