Compound interest is usually called the 8th wonder of the world for a good reason. This is because this can make your money work on your behalf.
Compound Interest – A Short Definition
Compound interest can be defined as the interest on deposit calculated depending on the accumulated interest from past periods and the initial principal alike. To put it in simple words, compound interest refers to the interest that you make on your interest. It is possible to compound interest on varied schedules of frequency like yearly, monthly, or even daily.
The compounded interest is greater if the number of the compounding periods is also higher. You can try to picture it like a snowball. When you start to save sooner and you add more money to your snowball, it will also grow bigger over time.
Now, imagine pushing this snowball down a hill covered with snow. The snowball that you already formed will remain and you will accumulate more snow along the way. Once the snowball gets to the bottom of the hill, this will still contain the amount of snow you began with together with the snow that it was able to pick up on along the way then even more snow above it.
This interest-on-interest effect will be able to generate returns that continually increase according to the amount of your initial investment. It means that if you save more often and when you save a larger amount, this will also return bigger interest amounts. It is known as the compound interest’s miracle.
Importance of Compound Interest
Compound interest makes it possible for your wealth to see faster growth. This can make the sum of money grow at a much faster rate compared to simple interest since you will be earning returns on your invested money and the returns when each compounding period ends. It means that there is no need for you to save as much money to achieve all your goals.
Compounding and its magic can be a crucial factor when trying to build your wealth. When you open an account that bears interest and start to stock money away earlier and sooner, you will also earn more money in compound interest. This is also the secret that can help mitigate factors that can erode your wealth such as reduced purchasing power, inflation, and higher cost of living.
Benefits of Compound Interest
It can be very helpful to have a compound interest when you can give your investment a substantial amount of time to grow and flourish. Compound interest also has the power of making even small investments earn large profits over long periods of time.
Compound interest can also help your account funds to increase fast since the growth rate is calculated according to the amount of accumulated money through the years on top of the original principal amount. This can also exponentially increase your money since your original investment and earned profits increase together at the same time.
If you wish to see your investments grow sooner or later, take advantage of compound interest to the fullest.