Step 8 - The Power of Compound Interest
When you invest your capital in an interest-bearing account, that money (your principal) earns interest. Many investments put your earned interest back into the principal, thus adding to that original amount. This new amount is a combination, or compound, of principal and interest.
Compound interest is the interest earned on the new compounded amount invested. As the original principal continues to grow in this way, so does the amount of interest you earn. It’s interest earning interest from now on.
To illustrate, below is a chart of an investment ($5,000) with compounded interest (5.5% interest rate). Note how fast the money grows over relatively short periods of time.
Compound interest is the interest earned on the new compounded amount invested. As the original principal continues to grow in this way, so does the amount of interest you earn. It’s interest earning interest from now on.
To illustrate, below is a chart of an investment ($5,000) with compounded interest (5.5% interest rate). Note how fast the money grows over relatively short periods of time.
Note: if you were to keep this investment going for just another 5 years, the original investment will have almost tripled, from $5,000 to $14,589.
The sooner you invest your capital, the greater the impact of compound interest and the faster you will reach your financial goals. So, start now! (Step 9 will delve deeper into investing).
The sooner you invest your capital, the greater the impact of compound interest and the faster you will reach your financial goals. So, start now! (Step 9 will delve deeper into investing).