As per Benjamin Franklin’s description:
Money makes money. And the money that money makes, makes money.
What is Compound Interest? #
In very simple terms, it’s \“interest on interest\”.
It’s the process of getting interest, not just on your initial investment, but also on the interest you gain from them, and the interest you gained from that interest, and so on…
Usually people talk about a snowball that gains momentum and size as it rolls further. But I like to visualize it as an exponential curve.
You can visualize it’s power using compound interest calculators. A simple Google search will give you many free websites like this one and this one.
How does it work? #
Compound interest is a long-term game. Over time, even small contributions can snowball into significant sums thanks to it.
Money example:
- Invest €1,000 at an annual interest rate of 5%.
- After one year, you’ll earn €50 in interest, bringing your total to €1,050.
- In year two, you’ll earn interest not only on the original €1,000 but also on the €50 you earned in year one. So, you’ll get €52.50 in interest, bringing your total to €1,102.50.
This might seem like a small difference initially, but the power of compound interest becomes evident over extended periods.
Is it a money only thing? #
No.
The example above was made to illustrate the core concept of compound interest. But it can be applied to various things in life.
If your goal is to be better, then striving to be just 1% better every single day will help you a LOT in the long run.
Tips #
The best time to start was yesterday. The next best time is now.
The sooner you start, the bigger the snowball. Even small amounts add up big time in the long run, so start early.
Be consistent, recurring actions are key. The more you contribute regularly, the faster you grow.
Remember, compound interest is a weapon for financial freedom and growth in general. Start early, stay consistent.
See ya 👋