Compound interest is like “interest on the interest” as the money made on a principal investment in turn earns more money.
Simple interest refers to the money earned on a principal investment. Compound interest, by comparison, is the “interest on the interest”. This means that the money made on a principal investment gets included in the calculation for future interest payments. For patient investors, this is often considered among the safest and most reliable ways to earn money.
Compound interest acts like a snowball rolling down a mountain. It’s been jokingly called the Eighth Wonder of the World, and it sure seems magical when it’s working in your favour. It’s less magical when it’s working on your debt, and it’s why people will tell you to pay down your most expensive debts first, not the biggest.
What’s the best thing you can do with compound interest? Start Early.
- “Interest on the interest” leads to a snowball effect
- Among the safest and most reliable ways to earn money
- Compound interest is more powerful with time, so start early