In simple terms, compound interest is interest earned on both the initial principle as well as the accumulated interest on money you’ve invested. In other words, you earn interest on interest.
To better understand how this works, consider the following:
- If you invest $1,000 in a five-year investment that earns five per cent simple interest per year, at the end of the term of the investment, you’d have $1,250 (your original $1,000 investment plus $50 per year in interest).
- If you were to invest the same $1,000 in an investment vehicle that paid five per cent interest, compounding monthly, you would earn $51 in interest the first year, $54 the second year, $56 the third, $60 in the fourth year and $62 in the fifth year, for a total of $283 in interest.
Want to learn more about how compound interest can maximize your savings? Our knowledgeable investment specialists would be pleased to help you.