You may have been brought here by tacos, if not, meet your financial best friend forever (#FBFF).
So, what’s compound interest?
Merriam-Webster defines compound interest as:
Interest computed on the sum of an original principal and accrued interest.
“Not helpful.” Understandable, don’t worry, we got you.
Compound interest gives you interest on top of your original investment and additional interest. Talk about a payday.
Let’s talk real world use.
Pretend you have $100,000.00 (I know).
If you were gaining, say, a 10% annual return, then you would end up with $10,000 added to your original investment. So, in our case, our end balance is $110,000 in year one.
Year two, the markets are great, and you are getting a 10% rate of return on $110,000, leaving you with an ending balance of $121,000. You earned $10,000 in year one. You earned $11,000 in year two. In year three, using this same math, you’d earn $12,100. Now imagine five years or more – talk about a snowball of money! And a lot of future tacos.