What is Compound Interest?
Compounding can seem like a complex concept however, it is quite simple – the longer amount of time you give your money to accumulate the more they have the potential to accrue. Compounding can be thought of interest paid on interest, in other words, deposits can grow at a faster rate.
As an example, Investor A saves $2,000 per year for the first 10 years of a 20 year time period. Assuming a 6% annual return her investment would be worth $50,042. Likewise, Investor B saved $3,000 per year during the second 10 year period of a 20 year time period. Assuming the same annual rate of return Investor B would have only accumulated $41,915. Even though Investor B saved more principal than Investor A the earnings of Investor A had longer to grow and therefore they ended up with a larger nest egg.
Albert Einstein called the power of compounding the 'eighth wonder of the world'. The bottom line here is to make your money work for you, start saving early and often.