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The Power of Compound Interest

Albert Einstein reportedly called compound interest the "eighth wonder of the world." Unlike simple interest, where you only earn money on your initial investment, compound interest allows you to earn interest on your interest. Over time, this snowball effect can turn small, regular contributions into a significant fortune.

How It Works

Imagine you invest $1,000 at a 10% annual interest rate.

• Year 1: You earn $100. Balance = $1,100.
• Year 2: You earn 10% on $1,100, which is $110. Balance = $1,210.
• Year 3: You earn 10% on $1,210, which is $121. Balance = $1,331.

Notice how the interest earned grows each year even though you didn't add more money? That's compounding.

Key Variables

• Principal: The starting amount.
• Contributions: Adding money regularly (e.g., monthly) accelerates growth dramatically.
• Compound Frequency: How often interest is calculated. "Daily" compounding yields more than "Annually" because the interest is added to the pile sooner.