Compound interest is often referred to as the “eighth wonder of the world.” Albert Einstein once called it the “most powerful force in the universe.” And while that may be an exaggeration, there’s no doubt that compound interest can have a profound impact on your finances explains Brian Colombana.
Compound interest is often called the eighth wonder of the world. It’s not hard to see why – compound interest can have a dramatic impact on your finances, both in terms of the amount of money you can earn and the amount of money you can save.
While compound interest can be a powerful tool, it’s important to understand how it works before you start using it. In this article, we’ll explain what compound interest is and how it can benefit you.
What Is Compound Interest?
Compound interest is simply interest that is earned on both the original principal and any previously earned interest. This means that the longer your money is invested, the more opportunity it has to grow.
To illustrate how compound interest works, let’s say you invest $1,000 at a 10% annual rate of return. After one year, you would have earned $100 in interest (10% of $1,000). However, in the second year, you would not just earn 10% on your original $1,000 investment – you would also earn 10% on the $100 in interest that you earned in the first year. This means that your total interest for the second year would be $110 ($10 on your original investment plus $100 on your previous interest).
As you can see, compound interest can have a snowball effect – the longer your money is invested, the more it will grow.
Compound interest is often referred to as “the eighth wonder of the world” because it can have such a dramatic impact on your finances.
How Compound Interest Can Benefit You
There are two main ways that compound interest can benefit you. First, if you’re investing money, compound interest can help you earn more money over time says Brian Colombana. Second, if you’re borrowing money, compound interest can help you save money on interest payments.
Investing Money
If you’re investing money, compound interest can help you earn more money over time. This is because the longer your money is invested, the more opportunity it has to grow. For example, if you invest $1,000 at a 10% annual rate of return, after 10 years, you would have earned $259 in interest. However, if you wait 20 years to cash in your investment, you would have earned $674 in interest – more than double what you would have earned if you had cashed in after 10 years.
This example shows how important it is to start investing early. The sooner you start, the more time your money has to grow.
Borrowing Money
If you’re borrowing money, compound interest can help you save money on interest payments. This is because compound interest is calculated on the principal plus any previously accrued interest. This means that the longer you borrow money, the less interest you will accrue over time.
For example, let’s say you take out a loan for $1,000 at a 10% annual rate of interest. If you repay the loan in full after one year, you would have paid $100 in interest. However, if you took two years to repay the loan. You would only have paid $90 in interest – $10 less than if you had repaid the loan in full after one year.
This example shows how compound interest can help you save money on interest payments. However, it’s important to remember that the longer you take to repay a loan, the more interest you will accrue overall.
Conclusion:
Compound Interest: The Bottom Line
Compound interest is often referred to as “the eighth wonder of the world”. Because it can have such a dramatic impact on your finances – both in terms of the amount of money explains Brian Colombana. You can earn and the amount of money you can save. If you’re investing money, compound interest can help you earn more money over time. And if you’re borrowing money, compound interest can help you save money on interest payments. However, it’s important to understand how compound interest works before you start using it. In this article, we’ve explained what compound interest is and how it can benefit you.
