The word ‘compound’ has more than a single definition.

• Compound in chemistry means a substance made up of identical molecules, each consisting two or more chemical elements.
• Compound also means ‘make something bad or worse’ , as in “reading this blog is only going to compound my headache.” Really? I hope not.  
• In law, compound means refrain from prosecuting in exchange of money or other consideration.

Now if you realize this, you’ll see that the word compound itself has a compounded meaning!

However the definition of compound that we want to focus upon is ‘incremental impact‘. Nope, That’s not in the list above.

Compound Interest & Wealth

This is the formula for compound interest where P= Principal, r= Rate of Interest, n= Number of times interest is compounded in a year, t= Time in years

How does compound interest lead to wealth?

Once you put your principal money in a compound interest account for a considerable period of time,  you’ll see that the interest you get initially builds over time and works the magic for you. At the end of the period you’ll have created wealth for yourself!

Concept of Compound Interest

The interest that you get is a reward of the ‘hard work’ your principal money has done.

If you add the interest back to the principal money, and let them together do the ‘hard work’, you’ll get even more interest (reward). Repeat each time. The principal or the ‘hard work amount’ keeps on increasing and so does the ‘reward’ you gain on it.

So much so, that after a long period of time, the interest component is significant compared to the initial principal amount.

An initial deposit with principal = $10,000 on a compound interest of 10%, year on year, after 25 years would create $125,000.

The Concept of Compounding in Life

Think about any activity that you want to do. Say you want to learn to play a guitar.

If you start with your initial level (principal amount) and practice (work hard), you’ll learn to play guitar a bit better (interest you earned on your initial level via hard work) . This new level of guitaring becomes your input or principal amount for the next round, and the interest you gain on it (your learning) would be even better.

With consistent and disciplined practice over years, you’ll realize that you’ve only become better than your earlier version. Your learnings over the years (your rewards), would add up to make an awesome guitarist out of you!

The concept of compounding applies to each and everything that we do or want to do in our lives. Think hobbies, think sports, subjects, or any activity at all.

Compound Interest applies to more than money.

Just about everywhere!