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Compound interest is what?


Saving for the future.Everyone tells you to start now,but the future is ages away, so why?I'll give you one good reason.Compound interest.It works like this.When you put money into a savings account,you'll earn extra money called interest.If you leave that interest in the account alongwith the original amount, it compounds.

In other words, becausethere is now more money in the account,you'll earn even more interest next year.And if you don't touch yoursavings, they will keep growing.Lucia and Romesh got $10,000 each fromtheir grandma when they turned 19.They each put their money into savingsaccounts that earned 3% interest.Lucia decides to save more,so she adds $100 per month.Romesh just leaves hismoney to earn interest.

After 10 years, Lucia hastwice as much money as Romesh.Wow!Romesh decides it'stime for him to start saving,so he copies Lucia andputs in $100 per month.Lucia, on the other hand, stops puttingmoney into her savings account for now.She knows her money will keepgrowing because of compound interest.Here's the kicker. Even thoughRomesh adds $100 a month,he will deposit more moneyfor much longer than she did.It's all because she started earlierand compounding works over time.

As well as savings accounts,compound interest is used by allsorts of financial funds.For example, it's one of the key buildingblocks for superannuation,which is the compulsory retirementsavings scheme in Australia.My 5 cents on compoundinterest is time is money.So the sooner you start, thebetter off you'll be.Cha-Ching!

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