What is Compound Interest?
Compound interest is a way of calculating interest on a loan or investment where the interest earned is added to the principal amount, and then interest is earned on the new, larger principal amount. This means that the interest earned grows exponentially over time.
For example, let's say you take out a loan of ETB 1,000 at an annual interest rate of 10%. After one year, you will owe ETB 1,100, because you will have accrued ETB 100 in interest. In the second year, you will earn interest on both the original ETB 1,000 and the ETB 100 you earned in the first year, for a total of ETB 110. This means that your balance will grow to ETB 1,210.
Compound interest can be a powerful tool for growing your wealth over time. If you invest your money early and let it compound, you can accumulate a significant amount of money over the long term. However, it is important to remember that compound interest can also work against you if you are borrowing money. If you do not pay off your loans quickly, you will end up paying a lot more in interest than you borrowed.