Compound interest means you make money on the interest you have gained in addition to making money on the original money you invested.

If you save $100 dollars at 5% interest, you will soon have $105.  The next year, instead of making another $5 on your original investment, you will make 5% interest on $105 which would be a gain of $5.25 giving you a total of $110.25.

This doesn't seem like much when calculated for two years on a $100 investment, but look what compound interest can do on larger and longer term investments.

A compound interest calculator gives the following results if someone starts with no money and invest $100 a month at a 8% interest rate:

20 years - $4,942.29
30 years - $12,234.59
40 years - $27,978.10
50 years - $61,967.18
60 years - $135,347.04
70 years - $293,768.65
80 years - $635,789.03
90 years - $1,374,185.37

Here's the results with a $400 monthly investment at the same 8% interest rate:

20 years - $19,769.17
30 years - $48,938.35
40 years - $111,912.42
50 years - $247,868.71
60 years - $541,388.14
70 years - $1,175,074.59
80 years - $2,543,156.11
90 years - $5,496,741.48

The lesson of these charts is to start investing as early as possible because the benefits of compound interest really pay off the longer your money is invested.

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