Could you explain Compound interest to me like I was a 2 year old?

Answer 1

Ok, say you invest $100, and the interest is 5% per year. If you had simple interest, every year, you would gain $5, because that is 5% of your original amount. With compound interest, the 5% gets applied to the new amount each year. So the first year you would get $5, making your total $105. the next year, you would get 5% of $105, so you would get $5.25, making your total $110.25, and the next year you would get 5% of $110.25, and so on.

Simple vs compound interest is just a question of whether the interest is applied only to your original amount, or to the new total.

Answer 2

Compound Interest just means that the interest you earn (or pay) is calculated on the principle plus the previous interest. For example, if you put $1000 into a bank at 3% annual simple interest, at the end of the year, you'll have $1030. But if the interest is compounded, then each day (or week or whatever), the interest is computed and added to the principle, making the next interest computation higher. Therefore, at the end of a year with compound interest, you'll have more than $1030.

Answer 3

(Assuming you get the idea of simple interest):

Say you had $100 invested at 10% interest. After the first year, you have $110. Now it's like you just invested $110 at 10% for the second year, so during that year your investment grows to 110*(1+.10) = $121. For the third year the interest rate is then applied to $121: 121*1.10 = $133.10

At this point you would have earned only $30 in interest with simple interest, so clearly compund interest is a better deal. It gets a little more complicated when the compunding takes place monthly or quarterly, but the idea is still the same.....

Answer 4

first about simple interest
in simple interest you get interest only on your prinicipal amount for each year at the specified interest rate.
If you invest $100 for 3 years at the interst rate of 10% per year,
every year you will get interest of 10% on $100 i.e $10 each year
so for 3 years your simple interst will total $30
The total amount at the end of 3 years is then $130

in compound interest, you not only get interest on the principal amount but also interest on interest
taking the same example
at the end of first year you have earned an interst of $10
at the end of 2nd year, you will earn $10 interest on the principal amount of $100 plus an additional 10% interest on the first year's interest of $10 i.e $1
So at the end of second year your total interest = $10+$1= $11
i.e instead of getting 10% interest for only $100 you got interest of 10 % on $110 which is $11
total amount at the end of second year is then $110+$11=$121
similarly at the end of 3rd year, you will earn 10% interest on the total amount of $121 i.e $12.10
total amount at the end of third year is then $121+$12.10=$133.10
Yoo can see that you got $33.10 as compound interest wheras as simple interset you got only $30
In short, you get a higher interest totally because the interest you get each year gets "compounded"

Answer 5

Look and listen carefully my child. With only two years you are interested in this? So you are a genius! Assuming that you explain like you would do to anybody! Otherwise, forget it, no way!

Answer 6

alright, kid, i'll give you the nickle. here you go, but wait, don't scurry off just yet...
i'll let you have it under one condition. everyday starting from tomorow, you give me back what you have plus half of that. the next day, that payment plus half of it.
good, deal.

BUT THEN WHEN I GIVE IT TO YOU, I WON'T HAVE ANYTHING LEFT TO GIVE YOU! PLUS, I'LL HAVE TO ASK MOM AND DAD FOR THE OTHER HALF! THAT'S NOT FAIR!

exactly kid. try telling that to the banks!

this will work for the first time interval, in this case one day. then i'll ask you to give me that payment plus half on it the next day when you've brought the dough; two year olds may not be able to process it all at once. hope you knew half when you were two :-) . good luck.

Answer 7

No, because a 2y young person hardly understands numbers and what about %?

Th