How Compound Interest Really Works

Compound interest is often described as magic. I think that’s unfair to compound interest. Most “magic” is just illusion and slight of hand. Once the trick is explained, the magic is gone. Not so with compound interest. The more you learn about how it works, the more you want to tap its incredible power.

Compound interest is the process in which the interest earned by an asset earns additional interest. If you invest $1,000 at 3% interest, at the end of year one you would have $1,030. In year two, you would earn interest not just on $1,000 but also on those extra $30. In year three, you are earning interest on the resulting $1,060. Lather, rinse, repeat for several years and the results can be truly stunning.

Related: 15 Secrets To Growing Your Wealth

This is one reason it is so important to start saving early. The longer your money compounds, the more phenomenal the results. Waiting just 5-10 years to launch your retirement savings plan can cost you a breathtaking amount of growth.

This video provides a nice introduction to the power of compounding. Think about sharing it with a young person in your life who might benefit from some financial education — and motivation.

Related: A Chart Every 25-Year-Old Needs To See Today

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