Wednesday, December 26, 2012

Financial Food for Thought (Compound Interest 101)

This is the first time some of my readers have ever heard of compound interest. Just incase my example in my previous post didn't clearly explain compound interest, I've put together a list of definitions and examples from different websites to help me better explain what compound interest is and how it can benefit you.


What is compound interest? It's interest earning interest. For example, suppose you saved and banked $100 a year ago. It earned $2 in interest last year. This year, you'll be earning interest on $102 (original savings plus the interest earned). That might not seem like much, but understanding that simple fact can have a major impact on your financial success.


Compound interest is, in a nutshell, interest upon interest. That is, when an interest payment is added to the principal and then the whole thing (principal + interest) earns interest.

The longer you save money, the more it can grow in value due to compound interest. Compound interest means you earn interest not only on the amount you deposit in a savings account, but also on all the interest you earned previously. (Provided you didn't take out any money, of course!)

I hope this helped!!  Please visit these sites, for further information.

1 comment:

  1. I am a little late to the party, but great article. I was searching for a calculator with compounding interest that takes into account inflation and came across this post. I think too many people forget about inflation when thinking about long term investment.