Personal Finance Term
Compound Interest
Interest calculated not just on your original amount but also on the interest already earned, so your money grows faster over time. The same effect works in reverse on debt, making unpaid balances grow faster too.
With compound interest, each period's interest is added to your balance, and the next period's interest is then calculated on the larger total. Over long periods this snowballing effect becomes powerful, which is why starting to save or invest early, even with small amounts, can matter more than saving larger amounts later. The more frequently interest compounds and the longer you leave it, the bigger the effect.
The flip side is just as important for Malaysian households: compound interest on debt works against you. Carrying a credit card balance, where unpaid interest is added and then charged interest itself, can cause what looked like a manageable amount to balloon. The practical takeaways are to let compounding work for you in long-term savings and investments, and to avoid letting it work against you by clearing high-interest debt as fast as you can.