Invest $100 that earns a 6% annual return and you’ll have $106 a year later. The uninitiated might expect to see $112 in their account after two, but they’d actually have $112.36 because interest not only accrued on the original principal of $100, but also on the $6 gained in year-one. Left untouched, that account would balloon to $1842 after 50 years — 18 times the original stake! No wonder Albert Einstein called compound interest “the most powerful force in the universe.”
The bottom line: Unfortunately, compound interest is a double-edged sword. It makes dedicated investors very wealthy … and irresponsible borrowers extremely poor.
Photo Credit: NASA Goddard Space Flight Center