The Power of Compounding Interest

At its core, compound interest is the process of earning interest on both the initial amount of money you invest, as well as the interest that your investment has already earned. In simple terms, you're making money on your money, and then making money on the money you've already made. This continuous cycle can lead to significant wealth accumulation over time.

1. Principal: The principal is the initial amount of money you invest. It's the foundation of your investment. The larger the principal, the more you can potentially earn in interest. 2. Interest: Interest is the extra money that you earn on your investment. There are two types of interest: simple and compound. In compound interest, you earn interest not only on your initial principal but also on any previously earned interest

Let's break it down with a simple example. Suppose you invest N1,000,000 in your SFS Fixed income account that offers an average 10% annual interest rate, compounded quarterly . Quarter 1: After the first quarter, you'll have an approx. value of N1,025,000 (N1,000,000 + 10% interest on N1,000,000 for 91 days). Quarter 2: In the second quarter, you earn 10% interest on N1,025,000, resulting in an approx. value of N1,051,000. Quarter 3: In the third quarter, you earn 10% interest on N1,051,000, yielding an approx. value of N1,077,000. Quarter 4: In the last quarter of the year, you earn 10% interest on N1,077,000, yielding an approx. value of N1,104,000. And this cycle continues, with your money growing at an accelerated pace. As time goes on, the interest you earn becomes a more significant part of your overall balance, resulting in exponential growth.

1. Time is your ally: The longer you keep your money invested, the more time it has to compound. Even small investments can grow into substantial sums over time. 2. Consistency is key: Regular contributions to your investment can supercharge the compounding effect. By consistently adding to your principal, you increase the base upon which interest is calculated. 3. Risk tolerance: Compounding can help you reach your financial goals with a lower level of risk. Over time, the impact of market fluctuations can be reduced as the compounding effect takes over. 4. Inflation hedge: Compounding helps you stay ahead of inflation. As your investments grow, they are less likely to lose value due to rising prices.