Investing classroom: Compound interest

Stocks lesson 1.2: The second in our series of investment lessons discusses the wonders of compound interest

Morningstar 1 October, 2009 | 4:22PM

The magic of compounding
When you were a child, perhaps one of your friends asked you the following trick question: "Would you rather have £10,000 per day for 30 days or a penny that doubled in value every day for 30 days?" Today, we know to choose the doubling penny, because at the end of 30 days, we'd have about £5 million instead of the £300,000 we'd have if we chose £10,000 per day.

Compound interest is often called the eighth wonder of the world, because it seems to possess magical powers, like turning a penny into £5 million. The great part about compound interest is that it applies to money, and it helps us to achieve our financial goals, such as becoming a millionaire, retiring comfortably, or being financially independent.

The components of compound interest

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