Compound interest is interest earned on money that was previously earned as interest. Thought to have been described by Einstein as the eighth wonder of the world, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which simply means a set percentage of the principal every year.
Tony Robbins, in his book Unshakeable Your Guide to Financial Freedom, states:
“You’re never going to earn your way to financial freedom. [Instead, compound interest is the eighth wonder of the world because] the real route to riches is to set aside a portion of your money and invest it, so that it compounds over many years. That’s how you will become wealthy while you sleep. That’s how you will make money your slave instead of being a slave to money.”
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Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one. The total initial amount of the loan is then subtracted from the resulting value.