How does compound interest work?

Compound interest is interest earned on both your original money and on the interest it has already earned, so growth speeds up over time. Say you invest 1,000 at five percent a year. After one year you have 1,050. In the second year you earn five percent on 1,050, not just the original 1,000, giving 1,102.50, and so on. Over decades this snowballs dramatically, and the earlier you start, the more powerful it becomes, because time is the key ingredient. The same force works against you with debt such as credit cards, where unpaid interest compounds and balances balloon. The practical lessons: start saving early, reinvest your returns, and clear high-interest debt quickly.