Some people like to refer to the principle of compound interest as magical – and while it’s not magical, it is a pretty cool mathematical principle.
Because the potential effect on your savings can be so dramatic, it seems to defy natural law.
Compound interest is what happens when the interest you earn on savings begins to earn interest on itself. As interest grows, it begins accumulating more rapidly and builds at an exponential pace.
How compound interest works
Imagine you contribute $1,000 to a hypothetical investment that earns eight percent annually.
After the first year, your balance is $1,080.