What is the compound interest?

If you already know me, you will know that I am not a financial expert. But also I like personal finance and to have enough control over the money come in and out my pocket.

I do not want to go into too much detail since on the Internet you can find experts in the sector and more complete and explicit information than I could provide.

In any case, you know that I like to share what I am learning and doing and that I think can be useful. So… let’s get to it!

If you have some contact with the financial world, surely you have already heard about the power of compound interest.

Although it is mainly related to finances, in reality the concept of compound interest is applicable to many other aspects.

Try to be 1% better in some aspect of your life and you will see what I mean. James Clear talks about that in his book Atomic Habits (in English) (in Spanish)

To specify about compound interest, I like to center the shot like this:

Compound interest is nothing more than the use of the profit we get for perform a certain action, so that the next benefit obtained is even greater.

The clearest example occurs in products that give us a certain interest for depositing our money.

Let’s imagine that we deposit 1000 euros in a product that gives us 5% annual interest.

At the end of the first year, we would have the initial 1,000 plus the 50 that represents 5% interest.

Compounding the interest implies using those 50 euros that we obtained as profit, so that the following year we obtain more profit.

If we do, at the end of the following year we would have 1050 + 52.5.

As you can see, in the second year we have increased 2.5 euros plus the profit obtained from the previous year.

And this story repeats itself over time, making the snowball bigger and bigger.

Below is a video where I show you what the numbers say, so you can get a better idea of ​​what compound interest is and what it means over time.

And as always, here is the link to the Google spreadsheet so you can use it if you need to.