Question

Explain compound interest in plain terms

Answer 1

1. if you save money at a bank

2. your bank makes money lending it out

3. your bank makes money by charging a certain amount of percent of the money it lends

4. that percentage is called it interest

5. money it lends is called principal

6. it can charge interest every week or month or year

7. money it charges every certain amount of time is called compound interest

Answer 2

Compound interest is interest that is calculated on both the principal amount and any interest that has already been earned. This means that the interest earned on the investment is added to the principal amount, and the interest for the next period is calculated based on the new total. Over time, the interest earned on the interest can lead to significant growth in the investment.