Compound interest is touted as one investment element that rich people harness to keep their money growing. Instead of investing all excess or idle money into a new business venture, funds are placed on investment tools that have greater potential to grow by way of interests.

Once money earned as interest becomes new cash fund, it can simply be allowed to stay and form part of the original investment. The entire amount will then rollover as new investment. The invested amount now constitutes the original principal, plus the interest earned by that principal. Basically, interest is compounded, since money earned as interest will also earn as new investment.

Ideally, that is how compounded interest works if all conditions favorable to your investment are present.

Keep in mind though that investing in tools like shares of stocks, bonds, mutual funds and bank products such as time deposits or money market accounts, include risks that are dependent on current conditions. Putting all monies in a single investment tool exposes the entire fund to potential risks. That being the case, it is also important to know the degree of risks involved as well to keep abreast of conditions that could adversely impact an investment.

Compound Interests Can Also Increase Credit Expenditures

Have an awareness that purchasing by way of credit cards increases actual costs of the commodities purchased. Credit card companies make a profit by collecting interest on every amount paid for and in behalf of a credit cardholder. If a particular purchase is not settled on the due date, the interest on that particular purchase is then compounded.

Although credit card companies may seem to give some leeway for settling a credit card debt by recommending a minimum amount of payment, be in the know that this does not work to a cardholder’s advantage.

Minimum monthly payments usually apply as payment of the current interest due on an outstanding credit card debt. This denotes that the principal amount plus any unpaid compounded interests are not reduced; but instead, they remain subject to collection of past due interests and other penalty charges.

Continuing to purchase via credit cards and paying minimum amounts therefore increases the principal balance on which interests are compounded.

The worst part is that even if a cardholder increases his or her payment with an aim to reduce the principal, the money paid will first apply as payment of default charges, past due interests and the interest on principal. As a result, only a fraction of the amount paid will reduce the principal balance.