Compound interest refers to the interest that’s calculated on your principal investment amount as well as on the accumulated interest of previous periods.
Essentially, you earn interest on interest, which can lead to exponential growth of your investment or savings over time.
That’s it! No wonder, no miracle, no magic. Just simple, brilliant math!
Why Compound Interest is Powerful:
- Time is key: The longer your money is invested, the more it grows due to compounding.
- Exponential growth: The interest earns interest, creating a snowball effect.
In contrast, simple interest only calculates interest on the principal, not on the accumulated interest, leading to slower growth.
Compound interest is a powerful financial tool in wealth-building strategies like saving for retirement or growing investments over time.