How would you explain the concept of compound interest to someone who has never heard of it before?

Explaining Compound Interest

Compound interest is a concept where the interest that accrues on an initial amount of money is added to the principal sum. As a result, the interest is then calculated based on the updated, higher total amount, leading to exponential growth over time.

For example, if you invest $1000 at an annual compound interest rate of 5%, in the first year you would earn $50 in interest, bringing the total to $1050. In the second year, the interest would be calculated on $1050 instead of the initial $1000, resulting in a higher return.

Compound interest allows your money to grow faster over time compared to simple interest, as interest is earned on both the initial principal and the accumulated interest. This compounding effect can significantly increase the value of your investment over the long term.