GRAFTON, Va. (WAVY) — Most of us would jump at the opportunity to make money while doing very little.
Chris Davis, a private banking manager with Bayport Credit Union, said that’s essentially what’s happening if you take advantage of compounding interest.
“Essentially it’s the power to earn interest on top of your interest,” Davis said.
Interest earned applies not only to the initial principal of an investment or a loan, but also to the accumulated interest from previous periods, according to the definition from Investopedia.
“For example, let’s say you put $100 in an account with a 10% interest rate. After a month, you’d have $110. Then after two months, you’d have $121, because the 10% is taken off the previous balance,” Davis said.
Compounding interest can happen in savings, money market and certificate of deposit accounts.
“It is an important tool in building long-term wealth,” Davis said.
However, it can also work against you.
If you only pay a minimum balance payment on a credit card debt or high-interest loan, you could get behind, as the amount owed could continue growing exponentially as a result of compounding interest.
