What it is
Compound interest is interest that applies to both the principal and interest already earned. When calculated this way, interest on loans, savings, and investments can grow faster than they would with just simple interest.
Here’s an example:
- You invest P1,000.
- It earns a 10% yearly interest, giving you P100. Now you have P1,100.
- Next year, you earn 10% on P1,100 and not just the original P1,000. That's P110 in interest, giving you P1,210.
- The year after, you earn 10% on P1,210, and so on.
What it means for you
The power of compounding can work for you and against you. On 1 hand, it can allow you to grow money faster over time if you’ll stay invested and keep reinvesting what you earn.
However, it can also cause debt to snowball if compound interest is charged on the original amount you borrowed plus any unpaid balance.
This is why paying off high-interest debt early and investing consistently — even with small amounts — are among the wisest financial decisions you can make.
_large.png)
