how does compound interest work.

Question

how does compound interest work.

In: Economics

Answer 1

You earn interest on the initial amount, but also on the previous period’s interest.

say you have $100 that gets 10% interest annually. At end of the year, you have $110 — $100+$10 interest. The next year, you’d earn the 10% on that $110, not just on the initial $100, so you earn $11 in interest.While it’s just a little difference early on, as the years go it, it starts to get much larger.