Compound interest and wealth building: A breakdown

Compound interest is one way to accumulate wealth with minimal intervention. Learn more about what it is and how it works.

Video Transcript

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- One of the most well-known secrets to increasing your wealth is the phenomenon of compound interest. Compounding puts the earning power of money to work for you. And the great thing is that it doesn't require additional work on your part. Compound interest, or dividends in the case of credit unions, is interest paid on interest as well as principle. The longer you invest your money, the higher your interest payments will be, as the interest you accrue each year will be based on not only your initial investment but also the previous interest that has been accumulated.

This is what makes compounding interest so powerful. The bigger your investment base, the more that time and math will conspire to build up your wealth. Consider applying some of these strategies by following a few easy steps. Invest early. The longer an investment is allowed to compound interest, the more your balance should increase each year. In the case of compounding interest, time really is money. So the sooner you can begin investing, the more interest or dividends and hence the growth of your principal. You can begin compounding your earnings earlier.

Invest often. Even though periodic investing doesn't assure a profit or protect against loss, adding to your investments on a regular basis can help build your wealth quickly. The accumulation builds the base on which your interest is calculated. Reinvest your dividends. If you own shares in a stock or mutual fund, you may be able to reinvest your dividends into more shares. It's putting your new income to work for you. Stay financially fit, friends.

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