Compounding interest is the interest you earn on both the principal amount of your investment and on any interest that has already accrued. This means that your investment grows at an increasingly faster rate over time.
For example, let’s say you invest $1,000 in a savings account that earns 5% interest compounded annually. After one year, you will have $1,050. The next year, you will earn interest on both the original $1,000 and the $50 of interest you earned the previous year. This means that you will earn $52.50 in interest the second year, for a total of $1,102.50.

As you can see, the amount of interest you earn each year increases over time. This is because the interest you earn is reinvested, which earns you even more interest in the future.

Compounding interest is so powerful because it can help your money grow exponentially over time. Even if you only invest a small amount of money each month, the power of compounding can help you reach your financial goals.
For example, let’s say you invest $500 per month for 30 years at an average annual return of 7%. After 30 years, you will have over $1.2 million.
This is a lot of money, and it is all thanks to the power of compounding interest.

There are many ways to start using compounding interest. Here are a few ideas:
Open a high-yield savings account.
Invest in stocks, bonds, or mutual funds.
Set up a recurring deposit to automatically transfer money from your checking account to your savings or investment account each month.
Reinvest your dividends and capital gains.

High-yield savings accounts: These accounts typically offer interest rates that are higher than traditional savings accounts. Some examples of high-yield savings accounts include:American Express High Yield Savings Account (currently offering 0.50% APY)
Discover Online Savings Account (currently offering 0.40% APY)
Capital One 360 Performance Savings Account (currently offering 0.40% APY)

Bonds: Bonds are debt securities that are issued by governments or corporations. They typically offer a fixed rate of interest, which is paid to the bondholder on a regular basis. Some examples of bonds include:U.S. Treasury bonds
Corporate bonds
Municipal bonds

Reinvesting dividends: Dividends are payments that are made to shareholders from a company’s profits. When you reinvest your dividends, you are using them to buy more shares of the company, which can help your investment grow over time.

Compounding interest can also be used to your disadvantage if you have debt. For example, if you have credit card debt with an interest rate of 20%, you will be paying more and more money each month. This is because the interest will be compounded on the remaining balance each month.

To avoid the negative effects of compounding interest, it is important to pay off your debt as quickly as possible. You can do this by making a larger monthly payment, or by transferring your debt to a card with a lower interest rate.

Books: There are many books available that can teach you about compounding interest. Some popular titles include:The Richest Man in Babylon by George S. Clason
The Millionaire Next Door by Thomas J. Stanley and William D. Danko
The Intelligent Investor by Benjamin Graham
The Little Book of Common Sense Investing by John C. Bogle
Articles and blogs: There are many articles and blogs available online that can teach you about compounding interest. Some popular websites include:Investopedia , The Motley Fool
Kiplinger’s Personal Finance, The Balance

Financial advisors: If you want to learn more about compounding interest, you can also talk to a financial advisor. Financial advisors can help you understand how compounding interest works and how you can use it to your advantage.