Compound Interest

Compound Interest

July 19, 2022

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Video transcript

"So you want to learn about Compound Interest? Well here’s a little story for you. Snow days. I used to love them as a kid. Now imagine you’re at the top of a hill and you’ve just made a snowball. It’s a pretty small one and so you can’t quite use it for the base of your snowman yet. But now let’s start rolling it down the hill. With every turn, the snowball picks up more and more snow. The bigger it gets, the more snow it can pick up and the faster it grows in size. By the time it hits the bottom of the hill it’s probably big enough to be the base for, I don’t know, marshmallow from Frozen. Now compound interest works basically the same way. You start off with a small investment early on, like when your kid’s born, and as the investments start growing it’s able to continue growing more and more over time. Basically you earn a return on your money, but then the return you earn also earns more return. By the time your kid’s 18 that little present that you gave them when they were born has grown into: a nice round the world ticket, maybe it’s even paid off half their uni fees or more. What’s even better is that compound growth isn’t a one off thing. You can continue adding to your investment over time. Can you imagine how much bigger your snowball would be, if every few metres as you’re rolling it down the hill, you stopped, you picked up some more snow, and you added it to it before sending the snowball on its way again? Your snowball would have grown so much faster."