Compound Interest

Albert Einstein was once quoted as saying “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” To understand the quote we need to get the definition of “compound interest”. It is interest paid both on the original amount of money and on the interest it has already earned. Simple interest, on the other hand, is the interest on the original principle only. Compound interest is applied to both loans and deposit accounts. Compound interest essentially means "interest on the interest" and is the reason many investors are so successful. You want savings to compound as often as possible. It's better if you compound quarterly rather than annually when you're saving money. If you're borrowing, just the opposite applies. Compound interest and time go hand in hand. Because as time goes on you will keep collecting interest and you can reinvest that interest and get more interest. That is the magic that is compounding interest! The great thing about compounding is that it doesn't require additional work on your part: you just sit back and watch your money grow.