Compound interest is an amazing factor of investing and growing wealth. It is built into almost every financial calculation when looking at retirement, growing investments, and increasing your net worth. Even Warren Buffet said that compound interest played a large part in his accumulation of massive wealth.
Compound interest is what happens when the interest earned on an amount of money becomes part of the principal, and then more interest is then earned on that larger sum. You interest earns you interest. This continues to repeat, and the account is said to compound year after year with new interest being earned because you reinvested the old interest in your account.
Compound interest is what happens when interest is added to previous principal and interest. For example, say you have $1,000 in a bank account, earning 10% interest per year. At the end of year 1, you would now have $1,100 in the bank account.
Now, that 10% interest is going to be earned on the new principal balance of $1,100. So, at the end of year 2, you would have $1,210. If you continued this same principle, in year 3 you would have $1,331, year 4 would be $1,464.10, and year 5 would be $1,610.51.
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