Understanding: Compound Interest and how does it work.

Compound interest is the interest that is calculated on the initial principal as well as the accumulated interest of previous periods on a loan or deposit.

This means that instead of earning interest only on your initial investment, you earn interest on both your original investment and any interest that has been added to it.

Compound Interest in Debt

While compound interest can work wonders in growing your savings, it can also work against you when it comes to debt. Credit card companies and lenders often compound interest on outstanding balances, meaning you can end up paying much more than you originally borrowed if you don’t pay off your balance promptly.

It’s crucial to understand the power of compound interest on debts as well as on investments. For instance, if you only make the minimum payments on a credit card, the interest on your debt can accumulate very quickly, turning a small balance into a much larger one.

How to Make Compound Interest Work for You

To make the most of compound interest, here are a few strategies:

Start Early: The sooner you begin saving or investing, the more your money will grow over time.

Invest Consistently: Even if you can’t invest large amounts at once, small, regular investments can yield significant returns over time.

Reinvest Your Earnings: Don’t cash out your interest or dividends reinvest them to maximize the compounding effect.

Avoid High-Interest Debt: Keep debt under control to avoid the negative effects of compounding interest working against you.