ABCs of Personal Finance: Compounding

When it comes to returns, we want them to compound….or make money on the profits we have previously made. This can be a very powerful tool and turn a “measly” 5% return each year, into a wealth building weapon. It also has the same powerful impact when it comes to costs, most notably, inflation. The knife cuts both ways, and the more often something compounds, the higher the new number will be. This is why many credit cards and other loans compound daily, or even continuously.