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What compound interest is Plays on its own
You put 10,000 into an account paying 8% a year.
In the first year the 8% is applied to the 10,000, so it earns 800. The balance is now 10,800.
The 800 stays in the account, so what the second year's 8% is applied to is 10,800, not 10,000. The bracket is the definition.
So the second year earns 864, which is 64 more than the first. That is compound interest: the interest joins the base, the base grows, and so does what it earns.
- TODAY
- 10,000.
- YEAR 1 EARNINGS
- 800.
- YEAR 2 EARNINGS
- 864.
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