August 29, 2023 | Allison Robertson

Understanding Compound Interest: The Power Of Money's Growth

When it comes to the world of finance and savings, few terms are as critical to understand as compound interest. 

Often dubbed the "eighth wonder of the world," compound interest can be a game-changer in how we view savings and investments. 

But what is it, and why is it so crucial for the average person to comprehend?

What Is Compound Interest?

Split image of an accountant and a wallet with money

Compound interest is the interest calculated on the initial principal, and also includes all of the accumulated interest from previous periods on a deposit or loan. 

Think of it as “interest on interest,” and it can cause a sum of money to grow exponentially over time.

Simple Interest Vs. Compound Interest

Obvious LieShutterstock

Simple Interest is calculated only on the principal, or on the portion of the principal which remains unpaid. For instance, if you deposit $100 in a bank at a simple interest rate of 5% annually, you'll earn $5 each year, indefinitely.

Compound Interest, on the other hand, builds upon itself. Using the same example but with compound interest, the first year, you'd earn $5 just like with simple interest. However, the second year, you'd earn interest on $105 (your initial $100 plus the $5 interest from year one) instead of just your initial $100.

The Power Of Compounding

Two woman are counting metal coins on the , Pexels

The more frequently interest is added to the total, the faster your money will grow. This frequency is typically described as annually, semi-annually, quarterly, or even daily. 

The more often your interest compounds, the more you earn.

The Rule Of 72

Cheap Buy That Worked Out Well factsShutterstock

A quick way to estimate how long it will take for your money to double through compound interest is the Rule of 72

Simply divide 72 by your interest rate, and the result is approximately how many years it will take to double your money. 

For example, with a 6% interest rate, it would take about 12 years (72 ÷ 6 = 12).

Compound Interest In Savings

Secrets They Hid From Their Children factsShutterstock

When saving money in an account that offers compound interest, the earlier you start, and the longer you can leave your money untouched, the more you'll have in the end. 

Even if you can't contribute more, letting it grow can result in substantial gains over time.

Compound Interest In Loans

Credit Card Debt 1

Just as compound interest can work in your favor when saving, it can also work against you when borrowing. 

Credit cards, for instance, utilize compound interest, which is why many people find themselves in larger debt than they anticipate if they only make minimum payments.

The Importance Of Consistency

Dumbest Things People Have Actually DoneShutterstock

Regular contributions, even if they're small, can lead to impressive results over time, thanks to compound interest. By regularly adding to your savings or investments, you can harness the full power of compounding.

Tools To Help

Young bearded man is working on laptop on his desk.cottonbro studio, Pexels

There are many online compound interest calculators that can assist in visualizing how your money can grow over time. By tweaking variables like the amount, interest rate, and time, you can see potential future outcomes.

Watch Out For Fees

People working on paperwork togetherRDNE Stock project, Pexels

While compound interest can accelerate your savings, high fees in certain bank accounts or funds can counteract its effects. Always be aware of any fees and factor them into your decisions.

The Time To Start Is Now

Man holding moneyLukas , Pexels

Understanding compound interest is foundational in financial planning. Its effects are most pronounced over extended periods, so the sooner you can leverage it, the better off you'll be. 

Whether you're saving for retirement, a large purchase, or simply want to grow your wealth, recognizing the power of compound interest is the first step toward reaching your financial goals.



People Share Their Most Ridiculous "Are You Kidding Me" Moments

We've all experienced moments in our lives when we were left so dumbfounded we couldn't help but think the universe was pulling some elaborate joke on us.
January 31, 2020 Eul Basa

Amazon Is Under Fire After Federal Investigators Discover Unsafe Conditions At Warehouses

This month, Amazon was served a major safety citation after federal investigators found multiple of its warehouses operating under unsafe work conditions.
January 31, 2023 Eul Basa

How To Find Cheap Dental Implants

A perfect smile doesn't have to be expensive. Find out how to get affordable dental implants near you with these simple tips.
January 31, 2023 Eul Basa

Not All Is What It Seems: Financial Advice On Social Media

They say don't trust everything you read on the internet. But does that apply to financial advice? It depends on who you listen to.
January 31, 2023 Eul Basa

Restless People Share The Terrifying Thing That Is Currently Happening To Them

Occasionally, we find ourselves facing a situation that is utterly terrifying. Moments like those force us to think about what really matters in our lives.
July 31, 2019 Eul Basa
Layer 3 pain

People Share Something They Didn’t Understand The Depth Of Until It Happened To Them

Sometimes, we never really understand the magnitude of someone’s pain until we have the misfortune of undergoing it ourselves.
May 31, 2020 Eul Basa

Dear reader,

It’s true what they say: money makes the world go round. In order to succeed in this life, you need to have a good grasp of key financial concepts. That’s where Moneymade comes in. Our mission is to provide you with the best financial advice and information to help you navigate this ever-changing world. Sometimes, generating wealth just requires common sense. Don’t max out your credit card if you can’t afford the interest payments. Don’t overspend on Christmas shopping. When ordering gifts on Amazon, make sure you factor in taxes and shipping costs. If you need a new car, consider a model that’s easy to repair instead of an expensive BMW or Mercedes. Sometimes you dream vacation to Hawaii or the Bahamas just isn’t in the budget, but there may be more affordable all-inclusive hotels if you know where to look.

Looking for a new home? Make sure you get a mortgage rate that works for you. That means understanding the difference between fixed and variable interest rates. Whether you’re looking to learn how to make money, save money, or invest your money, our well-researched and insightful content will set you on the path to financial success. Passionate about mortgage rates, real estate, investing, saving, or anything money-related? Looking to learn how to generate wealth? Improve your life today with Moneymade. If you have any feedback for the MoneyMade team, please reach out to [email protected]. Thanks for your help!

Warmest regards,

The Moneymade team