"Compound interest is the 8th wonder of the world. Those who understand it earn it. Those who don't, pay it." - Albert Einstein
Compound interest may seem like a tricky concept to grasp. But investing your time in this topic will help clarify how your initial savings amount can grow into thousands of dollars down the road.
Compound interest defined.
Compound interest is the interest the investor earns on his original investment (or savings), plus all of the interest earned on the interest that has accumulated over time.
That's a lot of interest!
Here is another way to think of it: Compound Interest = Interest Earned on Interest
This video helps make sense of how you can earn interest on interest, and what that means for the money in your account. The video also illustrates the benefits of earning compound interest rather than simple interest.
Compound interest is a marvelous thing—starting to save now for the future, your retirement, and other big financial goals, can mean hundreds, thousands or millions later in life. It does matter whether you start now, or in ten years. Getting started early on your saving, or investing, can mean tens of thousands of dollars in difference, literally.
What can you do now?
1. Prioritize. It is important to prioritize. If you’re buried in consumer debt—paying off your balance each month should be the top priority.
2. Research rates. Your financial institution provides a list of accounts and rates on accounts.
3. Start saving. Open a savings account or a share certificate with your credit union where you can earn compound interest on your initial deposit.