Understanding compound interest: Your money’s best friend

By Ephraim Ofori NUMOSUOR

If there is one financial principle that every Ghanaian seeking to maximise his/her investment should embrace, it is the power of compound interest. Often called the “eighth wonder of the world,” compound interest is the silent force that can either make you wealthy or keep you trapped in debt, depending on how you use it. Understanding how it works is the first step toward making your money work for you.

At its simplest, compound interest means earning interest on your interest. Imagine putting GH¢1,000 into an investment account that pays 10 percent per year. At the end of the first year, you have GH¢1,100 – your original GH¢1,000 plus GH¢100 in interest.

In the second year, however, you don’t just earn interest on the original GH¢1,000 – you also earn interest on the GH¢100 you gained. That gives you GH¢1,210. Over time, this “interest on interest” effect snowballs, and your money grows at an accelerating pace.

Now let’s stretch this out. If you leave that GH¢1,000 untouched for 20 years at the same 10 percent rate, it grows to more than GH¢6,700 without you adding another cedi. That’s the magic of compounding. The longer your money is left to grow, the more powerful the effect becomes.

But compound interest is a double-edged sword. While it can build wealth when you invest, it can also work against you if you are in debt. Credit cards, personal loans and even some forms of mobile money borrowing often apply compounding on the money you owe. If you delay repayment, the interest charges pile up on the principal and on the interest already added, trapping many in a cycle of ever-increasing debt.

So how can you make compound interest your friend instead of your enemy?

• Start early: Time is the most important ingredient. The sooner you begin investing or saving, the greater the benefit. Even small amounts grow into significant sums when given enough years.
• Be consistent: Make saving and investing a habit, not an occasional activity. Regular contributions amplify the compounding effect.
• Reinvest your earnings: Resist the temptation to spend your interest or dividends. Allow them to roll back into your investment.
• Avoid high-interest debt: The same principle that grows your savings can crush you when you’re paying 30 percent interest on a loan.

Think of compound interest as a hardworking employee who never sleeps and never takes a break. Every cedi you save or invest becomes a worker, and the interest it earns hires more “workers” for you. Over time, you build an army of money working around the clock, growing your wealth while you focus on your daily life.

In a world where the cost of living keeps rising, understanding and applying compound interest is one of the smartest financial moves you can make. The choice is yours: either let compound interest build wealth for you, or let it pile up debt against you. Make it your best friend, and your future self will thank you.

>>>the writer is a Financial Economist | Research & Policy Analyst. He can be reached via O248803710 and or [email protected]

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