Saving and investing basicsStep 1 of 6
Compound interest: the snowball effect
How interest on interest works, how to estimate doubling time with the rule of 72, and why regular saving is so powerful.
The snowball
Roll a small snowball down a hill — snow sticks to it on the way, and the bigger it gets, the more snow it picks up. Money can grow the same way: you earn interest, then that interest earns interest too. This is called compound interest.
Simple interest
- Interest is always calculated on the original amount only
- You earn the same amount every year
- Growth is a straight line
Compound interest
- Interest is also earned on interest already received
- Each year's gain is a little bigger
- Growth speeds up over the years
True or false?
«With compound interest the difference is big in the first years and then shrinks.»