Compound Interest

Compound interest is a financial principle in which interest earned on an initial investment is reinvested rather than paid out.

Unlike simple interest, which only earns interest on the principal, compound interest earns interest on both the principal and the accumulated interest.

This leads to exponential growth of the investment over time.

Consider the example of Sarrah, who invests one thousand dollars in an account that offers a ten percent annual compound interest rate.

In the first year, the interest earned would be ten percent of one thousand dollars, which is one hundred dollars.

In the second year, interest is calculated not only on the principal amount of one thousand dollars but also on the accumulated interest of one hundred dollars. So, the interest for the second year equals one hundred and ten dollars.

The total value of the investment grows to one thousand two hundred and ten dollars after two years.

This example highlights the significance of compound interest as a powerful tool for enhancing financial growth and ensuring financial security.