This is Definitions! I’m Malcolm Morrison. How important is compound interest? Well…Albert Einstein called it the eighth wonder of the world. The most influential physicist of the 20th century said that “He who understands it, earns it he who doesn’t, pays it.”
Essentially, compound interest is interest … on interest. That means you are making money not just on your principal but on the interest that has been applied. Say I have a thousand bucks…say I have 10$ bucks. I’m making five per cent on that money. In the first year, this means I will make 50 cents in interest, adding up to ten dollars and 50 cents. But in the second year I will make fifty two point five cents in interest is based on ten dollars and fifty cents – not the original ten. And so on it goes.
On the other hand, compounding can strangle you, financially speaking. Let’s say I have $10,000 on a credit card, which has a 20 per cent interest rate. After a year, excluding payments, that debt is up a fifth to 12 thousand because they’re paying 2000 in interest, a year later, it’s up to $14,400 – 2400 dollars in interest. And remember, there’s lots of cards that have interest of almost 30 percent. That’s definitions with Malcolm Morrison, I’m Malcolm Morrison.