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Money Girl

064 MG The Magic of Compound Interest

Money Girl

Macmillan Holdings, LLC

Investing, Education, Business, Entrepreneurship, How To

4.61.8K Ratings

🗓️ 12 March 2008

⏱️ 6 minutes

🧾️ Download transcript

Summary

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Transcript

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0:00.0

Hello and

0:05.0

welcome to Moneygirls quick and dirty tips for a richer life.

0:11.0

Today's topic, compound interest.

0:14.0

Albert Einstein is often quoted as having said something to the effect that compound interest is the greatest wonder of the universe.

0:22.0

It's an urban legend, but it packs some punch.

0:25.0

In today's episode I want to tell you about the magic of compound interest.

0:30.0

We hear about compound interest all the time, but what is it really?

0:34.4

Simply put, compound interest is interest you earn on your interest.

0:39.4

And it's a really important concept to understand because compound interest has the power to turn a modest investment into a lot of money over time.

0:48.4

So listen up.

0:49.7

There are two different types of interest, compound interest and simple interest.

0:55.0

With compound interest the interest you earn goes to work for you and earns more interest.

1:00.0

You earn interest on both your principal and your accrued interest.

1:04.0

With simple interest on the other hand, this isn't the case.

1:08.0

The interest you earn is not reinvested to earn more interest.

1:12.0

Take, for example example two people will call

1:15.0

Compound Connor and Simple Simon. Compound Connor invests $1,000 earning interest

1:21.0

at 10% compounded monthly.

1:24.0

Simple Simon also invests $1,000 but earns simple interest at 10%.

1:29.8

After one year, Simple Simon's $1,000 has grown to $1,100, while Compound Connor's $1,000 has grown

1:38.0

to $1,104.71.

1:42.0

Okay, so what's the big deal? $4.71.71.

...

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