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Warren Buffet once famously said that his wealth came from “a combination of living in America, some lucky genes, and compound interest.” 

The billionaire investor meant that the interest his investments earned helped create his fortune. But Buffett also liked to warn people about the dangers of ending up on the wrong side of the compound interest equation.

While compound interest is arguably the most important component to wealth-building, it can also be one of the best ways to wreck your finances: Having to pay compound interest can cause debt to spiral out of control. 

Most people only think of interest in terms of how high or low a rate is. But understanding how interest is calculated, or compounds, is important too. Knowing how compound interest works can help you avoid expensive mistakes and make the most of your money, whether you’re depositing it, investing it, borrowing it, or spending it. 

What is compound interest?

All interest is a percentage charged on, or earned by, a lump sum of money. Compound interest is a kind of interest based on adding the original principal — that is, the initial amount invested or borrowed — with the accumulated interest from previous periods.

For example, say you …read more

Source:: Businessinsider – Finance


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