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One of the most amazing things of the modern world is something that they don’t teach in school. Most people only learn about the negative aspects of this phenomenon, and usually too late. Einstein once said this is one of humankind’s greatest inventions. What is this amazing thing? Compound interest. In this article, you’ll learn all about compound interest.

Before we get to compound interest, we need to understand interest,and how it works. If you buy a hamburger, you pay money. When you buy money, you also pay money. You pay more money in the future, for the money you receive today. The extra money you pay is called interest.

You pay interest when you borrow money, and you receive interest when you lend money. Anytime you put money in the bank and receive interest, you are lending money. The bank is using your cash to lend to other people. They receive an interest rate, and they pay a portion of that interest rate to you.

Compounded interest works when you get interest on the interest. If you put a thousand dollars in the bank at ten percent interest, you’d have $1100 after the first year. But starting from the second year, you’d be making interest on your initial thousand dollars, plus the extra hundred bucks. And every year, your account will grow larger and larger at an exponential rate.

On the other hand, let’s say you buy something with your credit card. Credit cards usually charge interest rates between ten and twenty percent. If you have a balance of a thousand dollars, then you are paying two hundred dollars in interest every year. If you pay less than two hundred dollars in payments, your balance will continue to go up. In five years, your balance will double.

To get the most out of compound interest, you’ve got to get started early. Put some money in the bank, and let it sit there for as long as possible. And with credit cards, make sure you always pay them off.

When used correctly, compound interest can be a great thing. Just get started early, and you’ll have nothing to worry about.

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