07/13/2021
Compound interest is the great secret sauce of finance. It can work for you with investments, or against you with debts. Compound interest is when interest builds on itself; earning interest on your interest with investments or being charged interest on your interest on debts.
Say you have a $1000 investment that earns interest of 10%/year for 10 years. If you take that interest each year out of the investment, then you will make $100/year of interest, or a total of $1000 over 10 years. If you leave that interest in the investment and allow it to compound, then your return can be even greater. By the end of year 10, your $1000 investment would be worth $2,593 – total interest of $1,593, which is 59% more!
Compound interest is the key to growing your wealth and the longer you allow that interest to compound, the greater your total return. To stretch our example above further, at the 20 year mark the investment would be worth $6,727 and at the 30 year mark, $17,449.