How Compound Interest Works

Compound interest is what happens when the interest you earn starts earning its own interest.

Imagine you plant a single coin-tree that grows one extra coin for every coin already on it, once a year. Year one, your one coin grows one more coin — now you have two. Year two, both of those coins grow a coin each — now you have four. The tree isn't growing by addition anymore; it's growing by multiplication, and the effect gets more dramatic every year it's left alone.

In real terms: if you save $1,000 at a 7$1,967 in 10 years, $3,870 in 20 years, and$7,612 in 30 years — without adding another cent. The bank (or the market) is paying you interest not just on your original $1,000, but on every dollar of interest you've already earned.

Where this analogy breaks down: a real coin-tree would grow forever without any risk, but real investments can lose value in bad years, and interest rates change over time. Compound interest is powerful, but it isn't guaranteed — the 'tree' can also shrink.