Compounding Interest
Compounding Interest Albert Einstein reportedly called compound interest “the eighth wonder of the world” and “the most powerful force in the universe.” While the attribution might be apocryphal, the sentiment is mathematically sound. Compound interest is the fundamental principle behind most wealth creation, yet many people fail to harness its full power because they don’t understand how it works or start using it early enough. Compounding Interest At its simplest, compound interest means earning interest on your interest. This seemingly small distinction creates exponential growth over time, turning modest regular investments into substantial wealth. Understanding this concept is more valuable than any single investment tip or stock pick. Compounding Interest The Basic Math Compound interest differs from simple interest in one crucial way: Simple Interest: You earn interest only on your original investment. Example: $1,000 at 5% = $50 yearly interest Compound Interest: You earn interest on your original investment…