Understanding Investment Growth and Compound Interest
What is Compound Interest?
Compound interest is often called "interest on interest" - it's when you earn returns not only on your initial investment but also on the accumulated interest over time. This powerful concept can significantly accelerate your wealth building journey, especially over longer investment periods.
Key Investment Concepts
Understanding these fundamental concepts will help you make better investment decisions:
- Principal: Your initial investment amount plus any additional contributions
- Rate of Return: The annual percentage gain or loss on your investment
- Time Horizon: The length of time you plan to keep your money invested
- Dollar-Cost Averaging: The practice of investing fixed amounts regularly over time
The Power of Regular Investments
Making regular monthly contributions to your investment can dramatically increase your wealth over time. This strategy, known as dollar-cost averaging, helps reduce the impact of market volatility and builds wealth consistently through disciplined investing.
Investment Terms Glossary
- Compound Interest
- Interest earned on both the initial principal and accumulated interest from previous periods.
- Annual Return
- The percentage gain or loss on an investment over a one-year period.
- Future Value
- The projected worth of an investment after a certain period, considering initial investment, regular contributions, and compound interest.
- Principal
- The original amount invested, not including any interest or returns earned.
Investment Tips
- Start early to maximize the power of compound interest
- Invest regularly through market ups and downs
- Diversify your investments to manage risk
- Consider your risk tolerance and time horizon when choosing investments
- Reinvest dividends and capital gains to accelerate growth