A Visual Example of How Compound Interest Works

Compound interest makes your money work hard for you. This page shows how compound interest works and why it is important to start saving as soon as possible. You'll see an example with pictures, and we provide a free online compound interest calculator.

The goal of compound interest is to make your money work hard for you. The alternative, of course, is to work hard for your money. Which would you prefer?

The gentleman shown above has his dollars working for him. This is not a new concept. In fact, you can find historical references to compound interest from around the world.

The key step in using compound interest is to actually start saving. You don't have to save a lot – just save what you can. Compound interest will do the rest of the work for you.

It's important to get a competitive rate (or APY) for compound interest to work for you. You don't need to earn the best rate on the planet, but you should earn a competitive rate. A good place to find rates and accounts is on our online banking page.

If you want to skip the example and just see what your savings will generate, run the numbers in our compound interest calculator. For the rest of this example with pictures, read on.

Earn Interest on Your Savings

Because your money is in an account with a competitive rate, you'll earn interest payments on your initial deposit. Above, you'll see that the deposit (coin on top) earns interest (coins on the bottom).

To see how the interest is calculated at this point, read over the page on simple interest.

Earn Interest on Your Interest

Let's assume that your bank pays interest every month. As each month goes by, you'll earn interest on everything in your account. Most importantly, you'll earn interest on previous interest payments.

Don't forget that your initial deposit will also earn interest each month. It earns interest over and over again. The second interest payment is highlighted in yellow.

Hopefully you're starting to see the power of compound interest.

Earn Even More Interest on Your Interest

You probably aren't surprised to see this. Your interest payments will continue to earn more and more interest. Plus, the initial deposit will kick the cycle off many more times.

Note that you could take some money out of your account and spend it. However, you'll lose out on more compounding. Let's take a look at what happens if you leave everything in the account.

The Magic of Compounding

By leaving your money in an account that grows it, you end up with a nice reward.

It's really easy to do this, you just have to get money in an account and keep it there. Then, let compound interest do its thing.

Compound interest is so fascinating that Albert Einstein referred to it as "magic" and called it "The most powerful force in the universe…". Remember, this was a guy who knew a thing or two about forces in the universe.