yego.me
💡 Stop wasting time. Read Youtube instead of watch. Download Chrome Extension

How to make your money grow | Banking | Financial Literacy | Khan Academy


3m read
·Nov 10, 2024

In this video, we're going to talk about the power of compound interest. To help us understand that, we're going to compare it to simple interest.

Let's say we have an interest rate of 16% per year and we put in initially $1,000. Simple interest would tell us that every year that goes by, we're going to get 16% of that $1,000 added to the amount of money we have. So, 16% of $1,000 is $160. You can see right over here every year that goes by, we are adding $160.

Now, compound interest, at first, it might seem like a small or a subtle change, but it has huge consequences. Over here, we've calculated compound interest for several different interest rates. But since we had 16% on the simple interest, let's compare that to 16% on the compound interest.

So, in the first year, it looks very similar. We start with $1,000; 16% of $1,000 is $160, so we added $160. But we start to see a difference in year two. What do you think is the difference?

Why are we now adding more? If we just added another $160, we would get to $1,320 like we had here, but here it looks like we're getting $26 extra dollars than we had before. Where did that $26 come from? Well, it's because we're not just getting 16% on our original $1,000, like we had in our simple interest. We're getting 16% on the amount of money we had in the previous year, and the previous year had interest from the year before that included in it. So, we're actually getting interest on the interest.

We're getting 16% on the $1,000, and then we're also getting 16% on that $160 that we got the previous year. You add them together, and we're getting more money. Now, you might say, "Hey, let me just write that down." This looks like we got $186 in year two.

Now, this might seem like a small change, but when you really compound its effect—no pun intended—or actually, pun is very much intended, you see that it really builds. And time is a really important factor. Compounding interest really pays off over time.

Look at the difference after 10 years; it looks like we have almost 50% more money with the same interest rate. It's just compounding in this situation versus it's simple in the other one. But after 20 years, we have almost—or actually, we have more than four times the money.

So, compound interest is a very big deal. The good news is most accounts that you have that are giving you interest, as long as you keep the interest that you're earning in the account, they compound. So, whether it's your savings account, a certificate of deposit, or even if you're thinking about returns in the stock market, every year the return you're getting—if you're keeping all your money in the account—it compounds on the previous year.

And what you could see is that time really, really, really matters. Sometimes you might think at the beginning of your career, "Oh, I can only save $50 a month, $100 a month, $200 a month." But if you start early and you get reasonable interest rates, and you allow that to compound over time, it can turn into a lot of money.

More Articles

View All
How To Be a Loner
Until ganger is a German word that could be translated as lone wolf. It is the animal that does not live in a pack or at least doesn’t want to. In the human world, we call this person a loner; a person that follows his or her own path. I’ve called this c…
Where in the World is Jessica Nabongo? | Podcast | Overheard at National Geographic
[Music] No one knows exactly when humans started traveling, venturing beyond the little corner of the world they knew to discover new places. In some ways, it feels like it’s always been part of who we are as a species. Before babies can even walk or talk…
The Dark Truth Behind Coffee
I am addicted to coffee. While some fortunate people can spring out of bed ready to seize the day, when I wake up, the first thing that comes to mind is Buddha’s first Noble Truth: life is suffering. Or, as the German existentialist Martin Heidegger sugge…
Energy flow in a marine ecosystem| Matter and Energy Flow| AP Environmental Science| Khan Academy
In this video, we’re going to take a deeper look at the various producers and consumers in an ecosystem. For the sake of diversity, no pun intended, we’re going to look at a marine ecosystem. Let’s say, an estuary. An estuary generally refers to a place w…
How to Stop Taking Things So Personally
Miscommunication is a daily occurrence. Oftentimes, we aren’t doing a very good job when it comes to interpreting what people say or understanding the reasons why they say it. A common mistake is creating a story around a specific situation, which revolve…
Space Station Transiting 2017 ECLIPSE, My Brain Stopped Working - Smarter Every Day 175
Five, four, three, two, one, transit. Hey, it’s me. Destin. Welcome back to Smarter Every Day. August 21st 2017. It’s Matt Whitman, it’s Trevor. We’re in the middle of Wyoming. This is a really special spot. You have to understand we’re on a reservation,…