Compound Interest: How It Works and Why You Should Use It
Compound interest is a powerful financial concept that can have a profound impact on your wealth over time. It is a type of interest that is calculated not only on the initial principal but also on any accumulated interest that has been earned on that principal. Essentially, compound interest is interest on interest, and it can quickly snowball into significant returns over the long term.
In this article, we will explore what compound interest is, how it works, and why it is such an important concept for investors and savers to understand. We will also provide some practical examples of how compound interest can be used to your advantage and some strategies for maximizing the benefits of compound interest in your own financial planning.
What is compound interest?
At its core, compound interest is simply the addition of interest to the principal sum of a loan or investment. But unlike simple interest, which only earns interest on the initial principal, compound interest allows you to earn interest on both the initial principal and any accumulated interest that has been earned on that principal. This means that over time, the amount of interest earned on an investment can grow exponentially, making it a very powerful tool for building wealth.
