How Does Compound Interest Work?

The snowballing of your savings

There's a popular statistic about world-famous investor Warren Buffet's. Here it is: He's made over 99% of his massive wealth since the age of 52. 

 

This is largely because of compound interest.

 

  • If I pay you 10% a year on your $10, you'll get $1 at the end of the year. If this interest wasn't compounded, I'd continue to give you a $1 every year. But, if the interest is compounded, then in Year 2, I don't give you 10% of $10, I give you 10% of your $10 PLUS the extra dollar I had given you for Year 1. So, I give you 10% of $11, which is $1.10. Now you're at a total of $12.10 at the end of Year 2. And then for Year 3, you'll now receive $1.21 (10% of $12.10). 
  • In a matter of just three cycles, the money you received in interest has already increased by 21% (from $1.00 to $1.21). Not only do you continue to earn interest in your growing total, but the interest itself continues to increase. Year 4 sees you start off with $13.31, earning you $1.33 at year's end. You get the picture. 

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This is what you get to enjoy when depositing money into your DeFiner savings account, which pays you compound interest.  


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