Exactly How Compound Interest Works (Example!)

Compound interest multiplies your money and accelerates the growth of your investment. When you truly understand the power of compound interest, your mind will be blown. You’ll drop everything you’re doing and start investing NOW!

You know investing for your future is smart, but when you understand compound interest, you’ll get why time truly is money.

Here’s exactly how compound interest works.

First, let’s look at an example of $10,000 invested with 8% interest for 40 years.

To fully understand and appreciate compound interest, it’s important to first understand how simple interest is calculated. When it comes to paying off debt or investing you probably assume simple interest is calculated. In basic terms you estimate the total amount invested and multiply it by the interest rate every year. The official formula for simple interest is:

P x R x N

P= principal or the amount invested
R = interest rate
N= term in number of years

With simple interest over 40 years earning 8%, $10,000 will grow to $32,000 ($10,000 X .08 X 40). Ten thousand turning into $32,000 is pretty sweet, but the reality is when you invest, interest compounds.

Compound interest is when the interest earned, then earns interest. This doesn’t seem like it’d make a big difference, but $10,000 earning 8% compounding annually for 40 years turns into $217,245🤯.

This is why you hear of the “miracle of compound interest.”

Here’s a breakdown of how interest compounds over 40 years.

You’ll see the beginning of the year balance is multiplied by the interest rate and then added onto the principal amount. With simple interest, every year $800 flat is earned. The first few years, below you can see a little extra growth compounded.

Annual Interest Earned When Compounded⬇️

Year 1: $10,000 X .08 = $800
Year 2: $10,800 X .08 = $864
Year 3: $11,664 X .08 = $933
Year 4: $12,597 X .08 = $1,007
Year 5: $13,604 X .08 = $1,088

Let’s skip to years further down. This is where the magic starts happening and you see exponential growth.

Year 10: $19,990 X .08 = $1,599
Year 20: $43,157 X .08 = $2,452
Year 30: $93, 172 X .08 = $7,453
Year 40: $201,152 X .08 = $16,029

If you want to see the breakdown every year, use this calculator.

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By the end of year 40 you’ll have a nest egg of $217,245.

During the tenth year the interest earned hits double the total amount from the first year. In year 40 the interest earned is TWENTY times the amount earned from year one. The interest in during the last year is over 1.5 times more than the entire initial investment.

In summary, $10,000 compounds to $217,245. This assumes you never invest another dime, but simply let it grow for forty years.

Is your mind blown?

The truth is investing doesn’t need to be complicated or scary, you simply need to START. I’ll show you how. ⬇️⬇️

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