BANKING AFFAIRS

Detailed explanation-1: -Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together.

Detailed explanation-2: -It’s important to note the frequency of compounding as it can vary. Your interest could be compounded daily, monthly, quarterly, semiannually or annually. The more frequent compounding periods, the greater amount of interest and the faster your money grows.

Detailed explanation-3: -Compound interest is what happens when the interest you earn on savings begins to earn interest on itself. As interest grows, it begins accumulating more rapidly and builds at an exponential pace. The potential effect on your savings can be dramatic.

Detailed explanation-4: -The more frequently interest is compounded, the more rapidly your principal balance grows. Continuing with the example above, if you started with a savings account balance of $1, 000 but the interest you earned compounded daily instead of annually, after 30 years you’d end up with a total balance of $4, 481.23.

Detailed explanation-5: -The more frequently the interest is compounded, the higher the yield, or the rate of return on your investment. For example, if you had $5, 000 in an account that paid 5% annually in simple interest for five years, you’d earn $250 a year, for a total of $1, 250 in interest.