system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: how does compound interest work.
gpt
Compound interest means that the interest is added to the balance, and next period's interest is calculated off of the total balance, including the interest. Hence, it compounds.

$100 gaining 10% interest, compounding annually, grows like this:

End of year 1 - 10% of $100 which is $10, total balance is $110.

End of year 2 - 10% of $110 which is $11, total balance is $121.

End of year 3 - 10% of $121 which is $12.12, total balance is $133.12.

End of year 4 - 10% of $133.12 which is $13.31, total balance is $146.43

You see how each year the amount of interest goes up? It's compounding - you're getting interest on the interest.