The following is an encore presentation of Everything Everywhere Daily.

One of the most powerful forces in economics and finance is compound interest.

Not everyone understands compound interest, even though they may reap its benefits or suffer its consequences.

Compounding has the potential to build fortunes and wreck empires.

The effects of compounding are also not limited to interest payments.

It can apply to a great many things in and out of the financial world.

Learn more about compound interest, how it works, and its awesome potential on this episode

of Everything Everywhere Daily.

Albert Einstein was reported to have been asked what the most powerful force in the universe was,

and his answer was compound interest.

Actually, he probably never said that, but it's still a great quote,

and there's an alternative version floating around in which he calls it the eighth wonder of the world.

Perhaps the simplest explanation as to what compound interest is was given by the early American statesman Benjamin Franklin, who said, quote, money makes money, and the money that money makes,

makes money, end quote. It sounds a bit convoluted the way he puts it, but he's fundamentally correct.

Compound interest is the interest on a loan or deposit that's calculated based on both the initial principle

and the accumulated interest from previous periods.

Unlike simple interest, where the interest is only

calculated on the principal amount, compound interest grows faster because each period's interest

is added to the principal, and future interest is calculated on this newer, larger amount.

So essentially, you're earning interest on your interest.

This might not sound like a big deal at first, but as we'll see, that simple idea has

enormous potential and enormous dangers. There's a formula you can find for compound interest

...