Calculate the amount after the third year under the same assumption.
Compound interest is earning interest on interest that has already been added.
The calculation depends on the rate and the compounding frequency. In investments returns can vary and be negative, so an example with fixed interest is just an illustration. Fees, taxes and withdrawals change the outcome.
Assuming a constant 5% per year: 100 ₪ becomes 105 ₪ after one year and 110.25 ₪ after two years, before costs.
Calculate the amount after the third year under the same assumption.
Assume a constant 10% return each year with no costs for this exercise. An amount of 100 becomes 110 after one year and 121 after two, because the second year uses 110 as its base. Withdrawing the first gain changes that base. This is a mathematical assumption, not a promise about markets. Add a losing year to see how a smaller base changes the next calculation.
Concepts that help you compare
Percentages: The Language of Money
A percent is a part out of one hundred. Compute relative change by dividing the difference by the starting value. Percentage points are the difference between two rates: moving from 2% to 3% is an increase of one percentage point, but a relative increase of 50% in the rate.
Comparison example: 10% of 50,000 ₪ is 5,000 ₪. If 100 falls by 50% and becomes 50, a 100% increase is required to return to 100.
Inflation is a rise in the general price level over time. When prices rise, the same amount of money buys less. Nominal return describes the change in money; real return also accounts for the change in the price level. A rise in the price of a single product is not by itself a measure of the whole economy.
Comparison example: 100 ₪ bought a certain basket. If that same basket now costs 105 ₪, the same 100 ₪ is no longer enough for it.