Summary
- Compounding adds interest to the balance, which then earns interest too.
- Time matters more than people expect.
- Examples use simple, illustrative numbers.
Section 1.0
Definition
With compounding, interest is added to the balance at set intervals, and later interest is calculated on the larger balance.
Section 2.0
A worked example
Start with 100 at an illustrative 5 percent a year. After one year: 105. After two years: about 110.25, because the second year’s interest is earned on 105.
Section 3.0
The role of time
The longer money compounds, the larger the effect. This is why time is often discussed alongside rates.
Section 4.0
Reading disclosures
Look for how often interest compounds: daily, monthly or another interval.
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