What is Compound Interest?

Most of us have heard of interest. That's what you have to pay when you get a loan. That's what makes it so hard to pay back the loan when the interest rates keep on rising! Ah yes, and that's the measly little bit of extra money the bank gives - grudgingly, it appears - when we have a few bucks saved up. But wait! It's not as bad as it seems.

Those two magic words "compound interest" that Einstein referred to as the world's greatest discovery are put to work for us when we have a savings account. But those of us who have just a few hundred dollars don't seem to notice it all that much. That's because it shows up better on larger amounts - and if you don't keep withdrawing. These days most high interest savings accounts work on compound interest.

The interest that you earn on your $100 may not seem much, but it is added to the balance, and then in the second year interest is paid on that total, rather than just on your original $100. So you are basically getting interest paid on your interest or if you have a managed fund then it is the dividend reinvested. When this keeps on every year - as it does, so long as your keep your savings account going, then that total really begins to add up.