We hear a lot about compound interest, and how it can help you build your retirement.
Indeed, the power of compound interest is the subject of many articles on how to build wealth over time.
Even though compound interest is powerful, it’s not just a force for good. In fact, compound interest, like so much in the world of finances, is itself neither good nor bad. It’s how you use it that matters.
Understanding how compound interest works is essential.
A quote, commonly attributed to Albert Einstein (although it hasn’t been completely substantiated), points out that, “Compound interest is the eighth wonder of the world. He who understands it earns it, and he who doesn’t pays it.”
Compound interest can work against you just as well as it can work for you.
The key is to earn it — and not pay it. Debt is the way that you pay compound interest, and it works against you.