As Albert Einstein said, “Compound interest is the 8th wonder of the world.” Compound interest is the interest earned on top of interest.
Over time, compound interest can have a significant impact on the growth of an investment. By reinvesting the interest earned, the principal amount grows at an accelerated rate, resulting in a larger investment balance.
Here's an example: Let's say you invest $1,000 in an account that earns 5% annual interest. After the first year, you would earn $50 in interest. If you reinvest that interest, your new balance would be $1,050. In the second year, you would earn 5% interest on $1,050, which would be $52.50. Over time, the interest earned on the interest can result in substantial growth of the investment.
Compound interest is particularly beneficial for long-term investments, as the interest earned continues to grow over time. By starting to invest early and reinvesting the interest earned, investors can take advantage of the power of compound interest to help build wealth over time.