How compound interest works
What happens to 1,000 dollars at 5 percent a year over 30 years, and why interest on interest adds up.
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Transcript
You put $1,000 into a savings account that pays 5% a year. After one year, you have $1,050.
In the second year, you earn 5% on $1,050. So you also earn interest on last year’s interest. Now you have $1,102.50.
This is called compound interest. The interest is added to your money, and next year it earns interest too.
After 10 years, you have about $1,629. After 20 years, about $2,653. After 30 years, about $4,322.
If you only earned interest on the first $1,000, you would have $2,500 after 30 years.
The longer you leave the money, the faster it grows. That is why it helps to start early.
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