Have you ever heard of the power of compound interest? It’s a finance term that refers to the ability of your money to grow on its own, exponentially, over time. Imagine this: you invest $5,000 in an account that pays 5% interest per year. Within the first year, you would have earned $250 in interest. But that’s not all – the next year, you don’t just earn $250 on your initial investment, but also on the $250 you earned the first year. That’s the power of compound interest.
What is Compound Interest?
Compound interest is the interest earned on both the initial investment and any interest accumulated since it was invested. It’s the interest earned on your interest. It’s a simple concept, but it has an enormous impact on your finances.
How Does It Work?
Compound interest works by reinvesting the interest earned on your investment, leading to exponential growth. It’s a long-term strategy that requires patience, but it’s worth it. The earlier you start investing, the longer your money has to grow.
How Much Can Your Money Grow With Compound Interest?
The power of compound interest can significantly influence your money’s growth. Let’s take an example: if you invest $10,000 today and leave it to grow for 30 years at a 10% annual rate of return, your money will grow to around $174,000.