Compound interest a.k.a. the “snowball effect.” We know that interest is the money you make off an investment (or the money you are charged for a loan). Compound interest is the money you make off the interest on the money you are investing. That means it’s really “interest on interest” which will make an investment or loan grow at a much faster rate than regular ol’ interest. The exponential growth cuts both ways. On the investment front, it’s the most powerful force for increasing your wealth the fastest. In the race to make your money grow, if interest is a Vespa . . . then, compound interest is a Lamborghini. On the borrowing front, it can drive you into debt despair the fastest, too. For example, if you loan your friend $10 at 10% interest, compounded annually, she’ll owe you $25.94 after ten years. Don’t be naïve and think it’s just the simple percentage; com- pounding interest doesn’t just add up—it multiplies exponentially.A “snowball effect” for your money. This is the money you make off the interest on the money you are investing. That means it’s really “interest on interest,” which will snowball over time and make an investment or loan grow at a much faster rate than regular ol’ interest.
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