Explain · Like I'm five version
Compound interest in terms of a snowball
Have you ever wondered how a tiny snowball turns into a giant mountain of snow just by rolling down a hill?
Compound interest is like a snowball because it starts off very small and round. You put a little bit of money away in a bank, which is like packing a tiny ball of snow with your mittens. Every time the interest is added, it is like picking up an extra layer of soft, fluffy snow as the ball rolls over the grass. The bigger the ball gets, the more snow it picks up each time it spins around.
As your snowball rolls further down the garden, it starts to get quite heavy. The new snow sticks to the old snow, making the ball grow much faster than it did at the very top of the hill. Your money works the same way because the interest you earn starts earning its own interest too. It turns a little pocket money into a massive, frosty ball that takes up the whole path.
By the time your snowball reaches the bottom, it is much too big to lift up. You have let time and the hill do all the hard work for you, just by starting your ball early. That is why people say you should save your coins as soon as you can. It gives your snowball a very long hill to roll down, making it the biggest, shiniest snowball in the whole neighbourhood.
Where the analogy breaks downa snowball eventually stops growing when it hits a wall or melts, while your money can keep growing for as long as you leave it in the bank.