compound interest
Compound interest is the money your money earns, added back so that it starts earning too.
In plain English
Most people think saving is about how much you put away. It is really about how long you leave it alone.
Say you keep ₦100,000 in an account paying 10 percent a year. After twelve months you have ₦110,000. Here is the part that changes lives. In year two, the 10 percent is not calculated on your ₦100,000 anymore. It is calculated on ₦110,000. Your interest has started earning interest of its own.
Leave it for ten years and you do not have ₦200,000. You have roughly ₦259,000, and you never added a single naira after the first day. Leave it for thirty years and it becomes about ₦1.7 million. The maths did that, not you.
This is why the person who starts at twenty five with small amounts almost always finishes ahead of the person who starts at forty with large ones. Time is the only ingredient that is free, and it is the one you cannot buy back.
It works against you too. Debt compounds in exactly the same way, which is why a small unpaid balance has a habit of becoming a large one while you are not looking.
You save ₦20,000 every month into a fund returning 12 percent a year. After five years you have put in ₦1.2 million of your own money, but the account holds about ₦1.65 million. That extra ₦450,000 is interest earning interest. You did nothing for it except wait.
Questions people ask
How often does interest compound?
It depends on the account. Some compound daily, some monthly, some once a year. The more often it compounds, the faster it grows, so ask before you open anything.
Does compound interest work against me too?
Yes. Loan and credit card balances compound in exactly the same way. An unpaid ₦50,000 can grow far beyond what you expect, which is why clearing expensive debt often beats investing.
What rate should I look for in Nigeria?
Always compare the rate against inflation. If your money grows 10 percent while prices rise 20 percent, you are getting poorer slowly. What matters is the real return, not the headline number.
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