Compound interest allows investors to earn a profit with minimal effort. So, if you’re already using your money to earn a passive income, it’s a good idea to look at compounding your interest too.
To earn compound interest, investors need to continually reinvest their returns. Without taking advantage of it, investors can lose out an exponential amount over time.
So, let's take a closer look at compound interest and how it works.
Compound interest is often referred to as “interest on interest.” It involves adding the interest you’ve earned on an investment to the initial sum invested to earn more profit next time.
Many traders claim staking rewards and reinvest them into staking, increasing the amount staked and thus increasing the amount of future rewards. In this way, it is created.
Compound interest is significantly more profitable than simple interest (where the accumulated interest is not combined with the initial amount).
Let’s look at a basic example.
You have $1000 in a savings account with a 5% annual interest rate.
In year 1, you’d earn $50 on the $1000. So your new balance is $1050 at the end of the first year.
32e4b55304">In year 2, you’d earn $5 on $1050, or $52.50. So, your new balance is $1102.50 at the end of year 2.Thanks to the power of compound interest, your savings account balance would grow exponentially over time as you earned interest on increasingly larger amounts.
If you kept the original $1000 in this savings account for 10 years, you’d end up with $1,629.
After 20 years, you’d have $2,653.
And, after 50 years, you’d have amassed $11,468.
With compound interest, time is everything. The earlier you start, the more time you give your money to grow.
It is one of the most powerful financial forces in existence. Compounding successfully allows you to use less of your money to realise your goals.
Want to keep learning? Read about How to Earn a Passive Income on ETH here.
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