Compound interest is a powerful tool that can help you grow your money over time. By reinvesting the interest earned, you’ll be able to benefit from compounding and generate much more wealth than simply investing a lump sum. Discover how compound interest works and tools you can use to your advantage.
What is Compound Interest? Compound interest is the result of reinvesting interest, rather than paying it out immediately. This means that you earn interest on your principal invested amount plus all of the accumulated interest from prior periods. It has the potential to increase wealth more quickly than simple interest, which only applies to the principal amount of an investment.
Compound interest works best if left alone to accumulate over a period of time. This is because the more money you leave in an account, the more potential it has to earn additional investment income. It’s important to understand that this kind of interest compounds periodically; for example, every year or two months depending on your account. Thus, regular contributions into an investment vehicle like a 401k or IRA will allow compound interest to work its magic over time and maximize your potential earning power.
As the balance of your account grows, so does the interest that has been earned. What’s more, this interest is then compounded by itself and added to your account balance on top of any future regular contributions you make. In other words, with compound interest, you can earn money while simultaneously earning additional income from the money already in your account—an incredibly powerful tool when trying to grow a portfolio over an extended period of time.