'Money: It's Personal' — What is compound interest?

SAN ANTONIO – You may have heard of investments with compound interest, whether it's daily, monthly, quarterly or semiannual compounding. But what exactly does it mean when you have compound interest?

The Consumer Financial Protection Bureau said compound interest is when you earn interest on both the money you've invested, plus the interest you have earned.

Let's say your investment, also known as your principal, is $5,000, and it earns a 2 percent interest rate with yearly compounding for a total of 10 years. For the first year, you would have your $5,000 investment plus the 2 percent you earned in interest. That's a total of $5,100.

After the first year, compounding comes in. Your investment will start earning interest on the interest you've already earned.

So in the second year, your investment is now worth $5,100 and it earns $102 of interest. That's $2 earned on your $100 of interest from the first year.

While it may not seem like much, after 10 years, and because of compounding, your investment would grow to $7,429.74.

Your investment continues to compound year after year, giving you even more money.

But remember, most investments carry a risk, so you have to keep that in mind when deciding to use your money.

The Securities and Exchange Commission has a tool that helps you calculate compound interest. Click here to access the SEC’s compound calculator.

“Money: It’s Personal” is a series on KSAT’s News at 9 that breaks down personal finance topics. If you have a suggestion or question on they types of topics you'd like us to explain, click here.

About the Authors:

Ivan Herrera has worked as a journalist in San Antonio since 2016. His work for KSAT 12 and KSAT.com includes breaking news, COVID-19 coverage, personal finance stories on the "Money: It's Personal" series, as well as producing Q&As and content for the "South Texas Pride" series.

Valerie Gomez is the lead video editor and graphic artist for KSAT Explains. Before starting at KSAT in 2017, she worked as a video editor for KENS 5 and KVUE in Austin. She graduated from Texas State University in 2013 with a bachelor's in mass communication and is a product of SAISD and the South Side of San Antonio. She loves Jeff Goldblum.