What is compound interest ?

Okay, let's talk about a piggy bank where you can keep your money and magically get more money over time, just for keeping it there. This magic is called "interest."

Let's say you put $1000 in a very special piggy bank that adds a little bit of extra money every month because it's happy you're saving your money with it. This piggy bank is super special because the more money you have in it, the more extra money it gives you!

Simple Interest:

Imagine if every month, the piggy bank gives you $7 extra, no matter how much money is already in there. So, every month, you get a little more, but it's always the same amount extra, $7, because it's just looking at the first $1000 you put in and doesn't care if there's more money now. After 1 year, you count all the extra money, and it's the same $7 every month, for 12 months.

Compound Interest:

Now, let's imagine a different piggy bank, a really magical one. This one also starts by giving you $7 extra in the first month. But the next month, it looks at how much money you have now (which is $1000 plus the $7 extra from last month) and gives you a little bit more extra money based on the new total amount. So, every month, you get a bit more extra money than the last month because the piggy bank is happy you're keeping more money in it. This keeps happening every month for a year.

With compound interest, because the piggy bank keeps giving you more money based on how much is already in there (including the extra money it gave you before), you end up with even more extra money at the end of the year than with the first piggy bank.

So, with the special piggy bank that uses compound interest, your $1000 can grow and give you more extra money over time, more than the simple interest piggy bank, because it's like your money is working together with the extra money to grow even faster!