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Compound interest can help you get rich or go broke — here's how

Jeff Morganteen

Compound interest.

It's either the easiest way to double or even triple your savings, or a sure-fire ticket to bankruptcy.

Let's explain.

First of all, compound interest is different from simple interest.

Simple interest is a fixed rate over time, based on the initial amount you've invested.

If you've deposited $100 into a savings account with a 5 percent interest rate, all you need to do is multiply your principal by the interest rate, and then the amount of time you expect to keep that money in the account.

So $100 times 5 percent, or 0.05, is five bucks. Keep that account going for 50 years, and you'll earn $250 bucks in interest, for a grand total of $350.

Compound interest is different. It's essentially interest on top of interest.

Use it correctly, and you can turn small initial investments into small fortunes.

Let's take that same $100 from the first example, and the same 5 percent interest rate. If that interest rate compounds each year, your $100 would turn into $1,146 at the end of 50 years.

That doesn't sound like a lot. But if you matched your initial investment of $100 each month, without changing anything, you'd end up with $252,364 after 50 years .

Check out the video to learn more about compound interest.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.



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