The magnificent 8th wonder of the world.
This marvellous wonder has been a secret and a mystery to many people throughout time.
Luckily in our technological age we now have the ability to discover anything we wish at the click of a button!
What is this wonder? How can it be so great?
But seriously, what makes it so great?
Compound interest is basically like a snowball in that the more you continue to add to something, the more it naturally adds onto itself.
Let's look at a savings account with a starting balance of $5,000, an interest rate of 5% and at the end of each month we save an extra $1,000. For the first month you'll earn interest on the $5,000. In the next month you'll earn interest on the $6,000 as well as the interest you accrued for the first month.
After the first year you would have earned $534.66 just in interest alone, after the second year it would be $1,710.63 and the third year it is now $3,560.70.
Now just be mindful that compound interest can also work against us, most credit cards and significant debt tend to follow the same principle. So if you have a $25,000 debt and you're charged $500 in interest payments, the next month you'll be charged interest on $25,500 unless you start paying down your debt.
I know, there's a lot of numbers involved but in a nutshell, compound interest is the compounding effect for every decision we make, pay down debt asap, put your savings in a compounding interest savings account (not all savings accounts are made equal) and practice discipline in not dipping into your account as much as possible.
I've added a link below to a savings calculator so you can have a play with amounts and interest rates.https://www.ing.com.au/savings/calculators/savings.html