With compound interest, earnings are added to the balance and then earn returns themselves, so growth accelerates over time.
A simple example
Take a hypothetical $1,000 earning 5% a year, compounded annually. After year one you'd have $1,050; in year two the 5% applies to $1,050, giving $1,102.50. This is math, not a prediction: real products can lose money or charge fees.
Simple vs. compound
Simple interest is calculated only on the initial amount. Compound interest is calculated on the accumulated balance, so with a constant positive rate it grows faster.
What changes the result
- Time: the longer, the stronger the effect.
- Rate: higher rates usually come with more risk.
- Fees and taxes: they reduce net returns.
- Inflation: it erodes purchasing power.
It works against you, too
The same mechanism makes unpaid debts grow quickly. Check the effective rate and fees before borrowing. To start saving, read how to make a budget.
General educational content. It is not financial, tax or legal advice, nor a recommendation to buy or sell any asset. Crypto assets carry a risk of total loss.