You have probably heard of the term “compound interest”, but do you know how it works?

Compound interest is an important concept to grasp if you want your money to work for you. Compound interest can help you make a larger return on your savings and investments. 

Here’s everything you need to know about compounding interest. 

What’s compounding interest?

Compound interest is the interest you earn on an initial deposit you save or invest. Compound interest is earned over time, so the longer you invest, the more time you have to earn it. This is the amount of interest you earn as well as the amount of interest your interest earns. 

Yes, Totally correct. Interest earns money, the money earns money, and so on. 

Think of it this way:

Let’s say you invest 10,000 naira at 5% interest. In the first year, you would receive 500 interest payments. But, instead of withdrawing you reinvest at the same 5% interest rate. For the second year, which is calculated at 10,500 naira, which comes to 525 naira. 

If you reinvest in the third year, which will be calculated at 11,025 naira. That goes on and on, and over time the principal keeps getting larger.  

It’s important to note that several compounding schedules exist. Interest can be calculated daily, monthly, or yearly. 

If you switch from daily to monthly compounding, you’ll get a completely different result. The more interest accumulates over time, the more total interest accrues. This is why when investing or saving, it’s critical to focus on the best interest rates.     

How compounding interest can work for you? 

The concept “compounding interest” can work in varying capacities. Taking advantage of compound interest requires a bigger investment base, but more than that, time and a schedule of periodic investing will bring the results you need to build your wealth. 

Consider applying these strategies to make compounding interest work for you:

Invest Early: 

The longer time you invest, the more significant the effect of the compounding can be. The impact is undeniably far greater, the earlier you start investing and the longer time you invest. So, the earlier you can begin investing, the more interest or dividends you can earn. And hence the growth of your principal, which is being compounded gradually.    

Invest As Often as Possible: 

Though periodic or systematic investing does not guarantee a profit or secure you against loss, steadily topping your investments regularly such as monthly or weekly can help build your wealth quickly. The accumulation builds the base on which your interest is calculated.

Reinvest Your Interest:

To fully take advantage of compounding interest, you have to reinvest your interest back. This continues to build your investment base, allowing you to compound your return. It’s putting your new income to work for you.

Conclusion: 

Compound interest is a type of interest that starts small but develops exponentially over time. Depending on how much you can invest up front, it can potentially become a large sum of money for decades. Because your interest begins to earn interest, your investment grows faster. You have a tremendous advantage if you start young: time is on your side! start saving on Zimvest App today to take advantage