Compound interest is a financial concept that has the potential to significantly boost your savings over time. It is the interest earned on both the initial principal and the accumulated interest from previous periods. By reinvesting the interest earned, you can earn even more interest, creating a compounding effect.
To understand compound interest better, let's consider an example. Suppose you invest in a stock that pays a 4% dividend yield and the stock itself appreciates by 5%. In this scenario, your total earnings for the year would be 9%. This demonstrates how compound interest can work in your favor, allowing your money to grow exponentially.
Utilizing compound interest is not limited to stock investments. It can be applied to various investment vehicles, such as savings accounts, certificates of deposit, or even retirement funds. The key is to find investment options that offer compound interest and align with your financial goals.