The importance of Compound Interest

My guess, you are thinking – no technical jargon, please. Well, Compound interest sounds more complicated than it really is. In a nutshell, compound interest is making money off of the money you already made, or interest off the interest you’ve already made (this is why credit card companies have gotten so rich).

Let me make this even simpler for you: When you invest $1000 at 5% interest, at the end of the year (assuming the interest is compounded annually, some places compound more frequently, results in better return for you) you will have $1050 ($1000 times 1.05). So, you made $50 interest on your money.

If you keep that same investment in for another year and at the same rate, you will have $1102 ($1050 times 1.05). So, you will have made $52 in interest the second year, or a couple of dollars more that the first year, on the same intial investment.

The third year, you take that $1102 and reinvest it once again, and now you have $1157, or you’ve made $55 in interest. The following year you do the same, take the $1157 and reinvest it at 5% interest. The results are you now have more than $1214, or over $57 in interest made in one year.

Do this for several more years and your interest earnings will grow exponentially and you will be happy as heck.

So, why is this important you ask? Well, as you see in the above example, if you keep reinvesting your money – you will get greater and greater returns (for doing nothing more than reinvesting your money)!

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