Interest is rent on money. Somebody has it, somebody else uses it for a while, and the rent is a percentage of the amount for the time it was used.
Simple interest charges that rent on the original amount only. $1,000 at 5 percent simple earns $50 a year, every year, and after ten years the $1,000 has become $1,500.
Compound interest charges it on the original amount plus the interest already added. The same $1,000 at 5 percent earns $50 in the first year. In the second year it earns 5 percent of $1,050, which is a little more. After ten years it is about $1,630 rather than $1,500.
The gap is small over a year and large over a decade. That is the whole idea. Nothing clever happens: the interest simply starts earning interest of its own.
Compounding is not fast. It is patient, and then it is obvious.
How often it compounds matters as well. The same yearly rate applied monthly gives a little more than the same rate applied once a year, because each addition starts earning sooner. The difference is slight at low rates and plain at high ones.
It runs in both directions. Money owed on a compounding debt grows the same way, which is why a balance carried for a year costs more than the headline rate makes it sound.
One rough guide is widely used: divide 72 by the yearly rate for roughly the number of years an amount takes to double. At 6 percent that is about twelve years. It is arithmetic, not a forecast, and it says nothing about whether any rate will last.
General information about how money works, not advice. What is right for you depends on your own situation, and a licensed professional can look at that with you.
Peeka carries this piece too, under Insights and Learn, with the examples in your own currency. Read it in the appGet the app
