Explaining Compound Interest

Compound interest is a powerful concept in finance that allows your money to grow exponentially over time. Essentially, it means that you earn interest not only on the initial amount of money you invest, but also on the interest that money earns over time.

Imagine you have $100 invested in a savings account with a 5% annual interest rate. After the first year, you would earn $5 in interest, bringing your total balance to $105. In the second year, you would earn 5% interest not just on your initial $100, but on the new total of $105, resulting in even more interest earned.

Compound interest can help your money grow faster than simple interest, where you only earn interest on the initial principal. It's important to start investing early to take advantage of the power of compounding and maximize your wealth over time.

By understanding how compound interest works, you can make more informed financial decisions and plan for a secure financial future.