But What Actually Is Compound Interest?
Also known as ‘interest on interest’, compound interest speaks to the concept of investing your money and re-investing the interest earnt on that money. Combining regular, consistent investing over a long period of time with the power of compound interest can be incredibly effective in growing your wealth sustainably (and rapidly).
Examples of investments where the interest can be compounded include:
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If you want to grow your wealth, understanding compound interest is essential. Albert Einstein is said to have described compound interest as the world’s eighth wonder. The concept involves earning a return not only on your original savings but also on the accumulated interest that you have made on the past investment of your savings.
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For support in understanding how to develop and use a compound interest growth strategy to increase your wealth, book a bespoke investment strategy session with our investing consultants.
Here are some of our most frequently asked questions about our compound calculator and how it is works.
It’s useful to get your head around the term “effective annual interest rate” because it’s the actual annual rate of interest earned on your investment. It takes into account the effect of compounding interest and any fees or charges associated with it. It therefore represents the true annual earnings rate of your investment after factoring in compounding interest and fees. This makes it different from the nominal rate which doesn’t account for these factors. For investments with interest compounded more than once per year, the effective rate will be higher than the stated rate. For example, a 12% nominal rate with monthly compounding has an effective annual rate of 12.68%. The effective rate is a more accurate measure of the true return than the nominal rate. It’s also a powerful indicator of just how miraculous compounding is and why EVERYONE should be making the most of it with their investments.