3rd Part

The Power of Compound Interest

Compound interest is the interest you earn on both your initial savings (the principal) and the accumulated interest from previous periods. It’s often called the "eighth wonder of the world" because it allows your money to grow exponentially over time.

Key Concepts:

How it Works: Let's say you invest $1,000 at a 5% annual interest rate.

Year 1: You earn $50 in interest ($1,000 * 0.05). Your total is now $1,050.

Year 2: You earn interest on the new total ($1,050 * 0.05), which is $52.50. Your total is now $1,102.50.

The Importance of Time: The real magic of compound interest comes from starting early. The longer your money has to grow, the more powerful compounding becomes. A person who starts saving at age 20 will have significantly more money by retirement than someone who starts saving the same amount at age 30, even if they contribute less overall.