Business
What Is Compound Interest?
Discover the magic of compound interest, where your investment earns interest on both the principal and its accumulated gains. Learn how it fuels growth.
What is it?
Compound interest is interest calculated on the initial principal and the accumulated interest from previous periods. Often called "interest on interest," it causes wealth to grow at an accelerating rate. For example, a $100 investment earning 10% annually becomes $110 in year one. In year two, you earn 10% on that $110, reaching $121. This snowball effect is the core engine behind long-term growth in savings accounts, stocks, and retirement funds, turning small sums into significant nest eggs over time.
Why is it trending?
With a global focus on financial literacy and the rise of retail investing, compound interest is a key topic. Personal finance influencers and movements like FIRE (Financial Independence, Retire Early) champion its power to build wealth. In an uncertain economy, people are seeking reliable strategies for long-term stability. The concept's simplicity and profound impact make it a popular subject, as it highlights the immense advantage of starting to invest early, regardless of the initial amount. It's seen as a democratizing force in wealth creation.
How does it affect people?
Compound interest is a double-edged sword. For investors, it's a powerful ally that turns consistent contributions into substantial wealth, making it essential for retirement planning. For borrowers, it works in reverse, causing high-interest debts like credit card balances to swell rapidly. Understanding this duality is crucial for financial health. It empowers individuals to make smarter choices: to harness its power by investing early and avoid its pitfalls by managing debt wisely, directly impacting their long-term financial security and freedom.