Introduction
Compound interest is often called the “eighth wonder of the world.” Here’s how it works and why starting early can transform your savings.
What Is Compound Interest?
- Simple Interest: Earns only on the principal (initial amount).
- Compound Interest: Earns on principal and accumulated interest.
Example:
- Invest $100 at 10% annual interest.
- After 1 year: $110 (simple interest).
- After 2 years: $121 (compound interest).
How to Maximize Compound Growth
- Start Early:
- A 200/monthinvestmentfromage25at8200/monthinvestmentfromage25at81.1 million by 65**.
- Starting at 35 = $440,000 (half the time, half the result).
- Invest Consistently:
- Regular contributions grow faster due to compounding.
- Choose the Right Accounts:
- Retirement accounts (e.g., 401(k), IRA) and high-yield savings.
Compound Interest vs. Inflation
- Inflation reduces purchasing power, but compound growth can outpace it over time.
Tools to Calculate Your Growth
- Use online calculators (e.g., Compound Interest Calculator).
- Track progress monthly.
Conclusion
Compound interest is your silent partner in wealth-building. Even small, consistent savings can grow exponentially with time.