How does compound interest work?

Compound interest is a simple concept, but it can pay off in a big way. The more you have to invest, the more compound interest will impact your returns.

But what is compound interest, and how does it work? If you’ve ever wondered about the power of compound interest and its role in your future financial success, you’re not alone.

Compound interest is the process of earning interest on your interest. It may sound too good to be true – at least, if you don’t know about compound interest. You see, compound interest is actually a very big deal.
Compound interest is the process of earning interest on your investments many times over. As soon as you bring money into a financial institution, it can itself earn interest. But unless you’re extremely disciplined, it’s easy to forget about your savings and focus on everyday expenses.

Let’s take a look at exactly how compound interest works, its benefits and examples of how it’s used, so you can understand why it’s so important.
For example, if you have $10,000 and you deposit it at a rate of 2.5% per year, you will have $12,488 in ten years. If you start with $10,000 a year and deposit it at the same rate every year just $1,000, you will have $24,004 in 10 years and $4,930 in 20 years. That’s a lot of money! And compound interest is the reason.

The formula for calculating compound interest is as follows:
Final capital = starting capital * (1 + return) power (number of years)

But compound interest is not only important for your bank account. It is an important concept for anyone who wants to save for the future. With compound interest, your money can grow faster than you think.

The concept is quite simple: earning interest on your investments generates greater returns over time. That’s why compound interest is so powerful, especially if you continue to save over the months or years, it increases the effect of compound interest!
Compound interest can be useful in your personal financial life, it is so beneficial that you can start saving and investing money today to see the effects in 5,10 or 20 years!