By: Ross Cameron
August 15, 2017
Why You Should Understand the Importance of Compound Interest
Do you often wonder how some people seem to gain wealth with little effort? If so, you are not alone.
Saving money is an important part of life but understanding compound interest is even more vital to your financial well-being. Today, we are going to learn what compound interest is and how it can help you grow your overall wealth.
What Is Compound Interest
When most people think of interest, they often think about the debt they owe. But interest doesn’t have to be a bad thing. In fact, compound interest can work in your favor. You may be wondering, what is compound interest? It is basically interest on top of interested earned on a principal sum.
Instead of removing the initial interest from the account, the interest is left in the account. This will allow you to earn even more interest on top of the interest already earned. By reinvesting the original interest, this will help you build wealth much faster.
Example of Compound Interest
Below you will find an example of how compound interest works. This simple to understand formula will give you a better idea of how this financial tool can help you grow your wealth. The example here has a $500 yearly repayment option in place.
This is a common three-year repayment plan that allows you to gain compound interest. Some savings accounts will allow you to roll over your principal and interest until you are ready to remove your earnings. Many people choose this option while others like getting yearly repayments. The choice is really up to you.
First year: $1,000 x 10% = $100. Total is now $1,100
Second Year: $1,100 – $500 x 10% = $60. Total is now $660
Third Year: $660 – $500 x 10% = $16.00. Total is now $176
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Why You Should Be Utilizing Compound Interest
As you can see, compound interest is a great way to grow your wealth. If you are serious about improving your financial well-being, then you should definitely think about opening a savings account that does offer it. Over the years, the savings in your account will really start to add up and give you more freedom.
Having your money work for you is the real path to wealth and if you could look into the accounts of those who are rich, you will often find compound interest at work. So why not join the ranks of the wealthy and start letting your money work for you instead of working for your money?
Final Thoughts
Now that you know more about compound interest and how it can help grow your wealth, you should think about opening a savings account today. Not only will you be earning money on your principal investment, you will also be getting paid more interest on top of the interest you have already earned.
Many millionaires use this type of financial investment to hold on to their wealth. As you can see, this is a very safe way to invest your money and it will be protected while it’s in the bank. What’s not to love about that?
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it” (Albert Einstein, supposedly).