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Imagine you have a small mango seed. You plant it, water it, and over time, it grows into a big mango tree. This tree doesn’t just give you one mango; it gives you many, and inside each mango are more seeds. If you plant those seeds, you’ll have even more mango trees in the future. This is exactly how compound interest works — your money grows and then grows some more!
What is Compound Interest?
In simple terms, compound interest is the interest on a loan or deposit that is calculated based on both the initial principal and the accumulated interest from previous periods. It’s like earning interest on your interest.
Let’s Break It Down:
- Principal: This is the starting amount of money you save or invest.
- Interest: This is the extra money you earn or pay to keep your money with a financial service provider or to borrow money.
- Compound Interest: This is when you earn interest not just on your principal but also on the interest you’ve already earned.
Real-Life Example: Chidi’s Story
Meet Chidi. Chidi decides to save ₦10,000 in a bank that offers 10% interest per year. In the first year, he earns 10% of ₦10,000, which is ₦1,000. Now, he has ₦11,000.
In the second year, the bank calculates interest on ₦11,000 (not just the original ₦10,000). So, he earns 10% of ₦11,000, which is ₦1,100. Now, Chidi has ₦12,100.
If Chidi continues to save, the money keeps growing faster each year because he’s earning interest on a bigger amount each time.
Why is Compound Interest Powerful?
- Your Money Works for You: With compound interest, your money starts to grow without you adding anything extra. It’s like planting a tree and watching it bear fruits year after year.
- The Earlier You Start, The Better: The longer your money is left to grow, the more interest it will earn. Starting early means more time for your money to grow.
- Small Savings Add Up: Even small amounts can grow into large sums over time, thanks to compound interest.
How to Use Compound Interest Wisely
- Start Saving Early: The earlier you start, the more time your money has to grow.
- Be Consistent: Regular savings contribute significantly to the growth of your wealth.
- Choose the Right Savings or Investment Plan: Look for plans with favorable interest rates and reliable terms, such as Savingsbox Investibox and Savings, where you can earn up to 20% on Investibox and up to 15% on Savings.
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Final Thought
Compound interest is like a magical tree that keeps giving. The more you understand it, the better you can use it to grow your wealth. Start today, even with a small amount, and watch your money grow over time. Remember, in Nigeria or anywhere in the world, the secret to wealth is not just in earning but in growing what you have.
So, take that step now. Start planting your mango seeds of savings and investments, and enjoy the fruits in the future!