How Does Compound Interest Work for Investments?

Daniel Penzing
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What Is Compound Interest?

When making savings, you might hear words like “compound interest” used.

Compound interest is a tool that lets your money make money. This means that instead of making the same amount of money year after year, your money can earn a little bit more.

Remember, there’s no way to get rich quickly, but compound interest can help your money grow.

How Compound Interest Works

Compound interest increases over time. Over a longer length of time, an investment will have a larger total return. Compound interest is calculated by simple interest calculations added to the principal over time. The interest is then added to the principal (the original investment or loan).

Compound interest is also described as interest on interest, owing to the interest on the principal earning interest. The interest earned on the original investment earns interest, generating more interest on the principal. This interest on interest is then added to the principal amount, compounding even more interest over time.

The longer an investment stays invested and earning interest, the more it will increase in value.