Interest is what's accumulating on the initial balance of the loan at a given interest rate. It may be calculated as a percentage of the principal that was borrowed. Interest may be simple (interest on principal only) or 澳洲幸运5官方开奖结果体彩网:compounding (interest also on interest).

Compounding interest can either generate wealth—as with retirement savings plans, such as a 401(k) or an 澳洲幸运5官方开奖结果体彩网:individual retirement account𒐪 (IRA)—or potentially drive you deeper into debt, as with 澳洲幸运5官方开奖结果体彩网:credit card interest.

The 澳洲幸运5官方开奖结果体彩网:principal is the initial sum of money that is deposited into an account or used as a loan. It's what interest accrues on. Returns—what you make or lose with an investment—are calculated based on the principal balance. With a loan, such as a mortgage, for example, the principal is what's borrowed to purchase the home or land. Interest is additional.

Compound interest can seem almost magical when generating wealth, such as for retirement. In a high-yield savings account (for an 澳洲幸运5官方开奖结果体彩网:emergency fund, for example) or an investment account, compound interest works quickly, growing on itself. The 澳洲幸运5官方开奖结果体彩网:U.S. Securities and Exchan♋ge Commission (SEC) has a on its website.

For example, let's say you're saving for retirement. You make $104,000 a year. One rule of thumb is, at minimum, invest enough to snag your 澳洲幸运5官方开奖结果体彩网:employer match. In this case, that's 4%. (The average employer match is 4.6%, while the median—middle of the road—match is 4.0%, according to Vanguard.) So you're saving $4,160 a year, or about $346.66 per month. But don't forget—your employer is contributing the same amount to your account. Using the SEC's compound interest calculator, we find that, with an estimated interest rate of 7%, in a decade, you'll have a balance of about $115,000. In two decades, it'll be about $341,000. In three decades, it'll be about $786,000.

You can tell how the compound interest works by comparing the second figure ($341,000) to the first ($115,000): though it's twice the time (two decades vs. one), it's far more than twice the balance. The third figure ($786,000) drives the point home: it's far more than three times the first figure ($115,000), even though it's three times the amount of time (three decades, vs. one).

With a credit card, any balance that you carry from month to month will incur interest, and that interest will be compounded. That means that the interest will be calculated based on both the principal and the interest as it accumulates. (Simple interest, in contrast, is calculated using only the principal, not the accumulating interest.) This compounding interest will make it more difficult for you to pay off the balance every month. Another disadvantage is that it's a bit difficult to understand and calculate compound interest.