Why You Should Understand the Importance of Compound Interest

Why You Should Understand the Importance of Compound Interest

Do you often wonder how some people seem to get rich with little effort? If so, you are not alone.

Saving money is an important part of life, but understanding compound interest is even more vital to your financial well-being. Today we are going to learn what compound interest is and how it can help you increase your overall wealth.

What is Compound Interest

When most people think of interest, they often think of the debt they owe. But interest doesn’t have to be a bad thing. In fact, compound interest can work in your favor. You might be wondering, what is compound interest? It is basically interest in addition to the interest earned on a principal sum.

Instead of removing the original interest from the account, the interest is left in the account. This will allow you to earn even more interest on top of the interest already earned. By reinvesting the original interest, it will help you build wealth much faster.

Example of Compound Interest

Below is an example of how compound interest works. This simple to understand formula will give you a better idea of ​​how this financial tool can help you grow your wealth. The example here has a $500 annual repayment option in place.

This is a common three-year repayment plan that allows you to earn compound interest. Some savings accounts will allow you to defer your principal and interest until you are ready to withdraw your earnings. Many people choose this option while others prefer to get annual repayments. The choice is truly yours.

First year: $1,000 x 10% = $100. The total is now $1,100

Second year: $1,100 – $500 x 10% = $60. The total is now $660

Third year: $660 – $500 x 10% = $16.00. The total is now $176

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Why you should use compound interest

As you can see, compound interest is a great way to grow your wealth. If you really want to improve your financial well-being, you should definitely consider opening a savings account that offers it. Over the years, the savings in your account will really start to add up and give you more freedom.

Making your money work for you is the true path to wealth and if you could look into the accounts of those who are wealthy, you will often find compound interest at work. So why not join the ranks of the rich and start letting your money work for you instead of working for your money?

Final Thoughts

Now that you know more about compound interest and how it can help you grow your wealth, you should consider opening a savings account today. Not only will you earn money on your primary investment, but you will also receive more interest on top of the interest you have already earned.

Many millionaires use this type of financial investment to preserve their wealth. As you can see, this is a very safe way to invest your money and it will be protected while it is in the bank. What’s not to like about that?

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