When people talk about your money ” growing by itself” or “working for you”, they are indirectly talking about the compound interest or the compound interest effect.
But what exactly does this mean? Apart from probably the only thing we ever learned in math class that is of any relevance to our everyday lives. Or how often do you still do curve sketching these days?
Why we love compounding
When you invest your money, you (optimally) receive interest on it. This interest is either distributed at the end of an interest period, i.e. paid out, or automatically reinvested. If the latter is the case, your invested assets grow by the interest income, which in turn earns you interest in the next interest period and brings in new interest income. The so-called compound interest effect occurs.
Due to the ever increasing interest (and compound interest) income, your assets also grow faster and faster. Let’s love! The compound interest effect, with its exponential growth, is therefore an incredibly important means of achieving your financial goals.
To allow compound interest to take full effect, it’s vital that you start investing your money early. Time is money in this case.