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Understanding Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. It can work in your favor as an investor or against you as a borrower.

How Compound Interest Works

When you invest money, you earn interest on your capital. The next year, you earn interest on both your original capital and the interest from the first year. In the third year, you earn interest on your original capital and the interest from the first two years, and so on.

Factors That Affect Compound Interest

• Principal amount: The initial sum of money you invest
• Interest rate: The percentage of interest your money earns
• Compounding frequency: How often interest is calculated (annually, quarterly, monthly, etc.)
• Time: The length of time your money is invested

Tips for Maximizing Compound Interest

• Start investing as early as possible to take advantage of time
• Invest regularly through automatic contributions
• Reinvest dividends and interest payments
• Be patient and avoid withdrawing funds early
• Seek investments with higher returns (while managing risk appropriately)