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Why Should You Learn How to Invest? — Reason 4: Harness the Power of Compound Interest
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Reason 4: Harness the Power of Compound Interest

Harness the Power of Compound Interest

Compound interest is interest paid on the principal amount plus whatever interest has already accrued in the account. In simple terms, compound interest is interest on interest. Or, as Benjamin Franklin put it, “Money makes money. And the money that money makes, makes more money.”

Here's an example: you invest $1,000 this year and it earns a 10% return. That gives you $1,100 in your account. Now let’s say you still earn that same 10% return in the second year. But instead of $100, you’ll actually earn $110 because that 10% return is on your new, bigger $1,100 balance. And the longer the period in which you invest your money at a set rate of return, the bigger your gains will be.

“Compound interest is the eighth wonder of the world. He who understands it earns it... he who doesn’t... pays it.” — Albert Einstein

Warren Buffett once said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” That doesn’t mean we’re all going to become Warren Buffett-rich. That just means we too can try and take advantage of compound interest as well.

Warren Buffett, one of the most successful investors in the world, has generated his impressive wealth through the power of compound interest.