Compound interest is either working for you or against you. Deemed the greatest force in the universe by Albert Einstein, understanding how it works is the key to winning the money game. First, what is the definition: Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. It works against you by paying interest in the form of a loan or working for you with earning interest by depositing principal into an investment.
How to understand compound interest so that you will earn more than pay more
It is also helpful to compare something to another for additional perspectives. Watch this video that compares simple interest to compound interest. (Compound Interest) If you’re the calculating type here is a link on how it is calculated. (How to Calculate Compound Interest)
Albert Einstein once said that “compound interest was the most powerful force in the universe.”
Compounding interest is earning interest on interest. It’s what helps turn money into more money. For anybody not just the wealthy. Investors refer to it as “magic of compounding” for the incredible way it grows your money at an accelerated pace. Compounding can super-charge the growth of your savings account, but it’s also relevant to investments. To get the greatest benefit of compounding, reinvest and don’t spend the earnings. To increase compound growth, invest more, let your money grow for a longer period of time, and find the best return rate you can. (Compound Interest Napkin Presentation)