Why You Should Know About Compound Interest

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3 years ago


The Lowdown on Compound Interest

Sometimes financial terms can be a bit overwhelming. But, if you take the time to understand them you won’t only be more knowledgeable but you will be financially healthier. So, we all know about that dreaded interest we all get, however, do you know about compound interest?


Well, compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest is so important and is called compounding.

It basically can be referred to as “interest on interest.” If you can try to avoid this as the rate at which compound interest accrues depends on the frequency of compounding and usually grows at a rapid rate. So, the higher the number of compounding periods, the greater the compound interest. A great example of this is if you have $100 compounded at 10% annually will be lower than that on $100 compounded at 5% semi-annually over the same time period. For more on compounding, check out the video above.