The Power of Compound Interest
Compound interest has been dubbed the "eighth wonder of the world." Benjamin Franklin held a similar fascination with compound interest, using it to create endowments for the cities of Boston and Philadelphia that are still paying out. What is it about compound interest that drew the attention of these geniuses, and what separates it from other forms of interest?
Simple interest
Generates interest on the principal only. In other words, if you had $1,000 in an account and it generated $50 of interest over a year, it would only yield another $50 the next year because it's only earning interest based on that initial $1,000 deposit (a.k.a., the principal).
Compound interest
Generates interest on BOTH the principal and any interest earned over time.
In other words, compound interest takes your investment much further. For example, if you had $20,000 and divided it among two investments—one offering 10% simple interest and the other offering 10% compound interest—you'd see far greater returns over the next three decades with the compound interest investment. Over a 30-year period:
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While there are many advantages when compound interest is calculated in your favor, it's also important to remember that not every investment opportunity will provide this option. For this reason, it's important to keep your eye out for these opportunities when they arise.
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