Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.
Compound interest is a powerful financial concept that allows your money to grow at a faster rate than simple interest. It is calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan. This means that the interest you earn in the first period will also earn interest in subsequent periods, leading to exponential growth over time.
For example, if you invest $1,000 at an annual interest rate of 5%, after one year, you will have earned $50 in interest. In the second year, you will earn interest on $1,050, which will be $52.50. This cycle continues, and over time, the amount of interest earned increases significantly.
“The most powerful force in the universe is compound interest.” - Albert Einstein
To maximize the benefits of compound interest, it is advisable to start saving early and to reinvest the interest earned.
