You’ve all heard it before. Compound interest. It’s how money is made. However, if you grew up like most of America, you’ve probably heard of compound interest, but don’t really understand what it means. So, here’s a quick introduction.

Compound interest basically means you earn money on the interest, or percentage, of the amount of money that you put in.

For example, say the bank pays you 10% yearly interest (just imaginary, easy to use numbers for now).

You put in $100.

$100 x .10 = $10 (You multiply the amount you put in, with the interest rate of 10%, which is equal to .10)

After a year, you’ve earned an extra $10 in your account, which means now you have: $100 + $10 = $110.

So the following year, you are now earning 10% interest on that $110. And so on and so forth, i.e. the interest earned gets compounded into the next year.

Using a quick calculator, after 10 years, you’ve earned almost $260. All just for putting in $100 one time. The best part, the more you put in, the more you earn. What if you are able to put in $1,000? that’s $2,600. You’ve more than doubled your money back. Put in $10,000. You will earn $26,000!

Now you know why the rich are able to stay rich. Imagine having a million dollars just lying around. With a 10% return, you’re making a six figure income ($100,000) just by parking your money in an account somewhere.

Think 10% return is an unrealistic number? Do a quick google search for “average stock market return.” Well, what do you know: 10%. So stop putting your money under a mattress and start putting it into an investment account that’ll earn you some money.

Next time, I’ll go into detail about what types of accounts you can check out.