Compounding Interest: MONEY making you MONEY

Imagine that you have some money, let's say $100. You decide to put that $100 into a savings account that pays an annual interest rate of 5%. At the end of the year, you would have earned $5 in interest (because 5% of $100 is $5), so your total balance would be $105.

But here's where compounding interest comes in: instead of just leaving that $105 in the account and earning another $5 in interest the following year, the bank adds the $5 to your original balance of $100, so you now have a new balance of $110.

When the bank calculates the interest you earn in the second year, they'll use that higher balance of $110, which means you'll earn a bit more interest – $5.50, to be exact. So your new balance at the end of the second year would be $115.50.

This cycle of adding the interest earned to the original balance and then earning interest on the new, higher balance continues each year. Over time, the amount of interest you earn will get bigger and bigger, as long as you don't withdraw any money from the account.

Compounding interest is when interest is added to the original amount you saved, and then future interest is calculated based on the new, higher balance. It's a great way to make your money grow faster over time.

Have some fun with the compounding interest calculators using larger amounts with a higher return on investment.

Current retirement balance: $1000

Total monthly contributions: $100

Annual Return on Investment: 8%

Years until retirement (retirement age 66) - 40

Future value: 375,701.51

Interest earned: $326,701.51