Compound Interest In My Own Words (Round 2)

Moneychimp.com

I finally gave in to the second website that comes when you Google "compound interest." I'm terrible with numbers. I tried searching through all the others that came up, desperately trying to come with a definition and an understanding of what compound interest is.

So I gave up.

I tried my hardest to avoid using one of the 1,500 online compound interest calculators, but I couldn't. Turns out that I was just overthinking. I kept convincing myself that there was this crazy concept I wasn't getting, a missing equation I couldn't possibly understand or maybe I just wasn't carrying the one over to the next column.

According to Moneychimp.com, if you invest $1000 over three years with four percent interest that compounds annually you end up with $1,124.

After several hours of excruciating financial breakdowns, calculators and pie charts I realized that you only need to know 5th grade math to execute this equation and I decide to break it down.

The first year, you invest $1000. 4% of $1000 is $40. Your total over the first year is $1,040.

The second year your money is invested, you take the $1,040 you earned the first year, and add 4% of that. 4% of $1,040 is $41.60. Add $1,040 and $41.60 together and you get $1,081.60, your total for the first two years.

The third year your money is invested you start with that $1,081.60 and, once again, add 4% of that to the total. 4% of $1,081.60 is $43.26. Add that $43.26 to the $1,081.60 and you get.....

....$1,124.86!!!

So easy a moneychimp can do it.