How to Take Advantage of Compound Interest

Compound interest will accelerate momentum to help you reach financial goals.

Compound interest can boost your savings over time. MaxG Photography/Shutterstock

Whether you’re investing or parking your money in a high-yield savings account, either activity can work for you and help you build wealth. This occurs through compound interest, which is a powerful tool and can potentially generate thousands of dollars over the years.

It is, however, essential to understand how compounding interest works so you can take advantage of it. Knowing when it can hurt you is also necessary for your financial well-being.

Compound Interest Generates Income

Compound interest occurs when the interest earned on an investment or savings account is added to the balance. Future interest is calculated on the new amount. The process is repeated over each compounding period. This results in your investment or savings growth rate increasing in value.