In my Financial Literacy column, I often talk about why it is so important to invest for the long term, and I point to compounding as the secret ingredient. That has led to a question from a reader who asked me to explain compound interest. Albert Einstein is noted for saying that compound interest is "the most powerful force in the universe." It gets more powerful the longer you use it. That's because the money you make on your principal starts making money too. Let's look at exactly how it works. If you begin with $10,000 earning 10% interest, at the end of one year, you'll have $11,000. The next year, your $11,000 earns 10% - so instead of making $1,000 in interest on $10,000, you're making $1,100 in interest on $11,000. That extra $100 may not seem like much - but watch what happens over time. As you can see in the table above, you start out making $1,000 per year in interest - but as you let the funds compound, that yearly interest builds on itself. By year five, you're making $1,464 in interest - a 46% increase over the first year - and you have $16,105 at year-end. | 
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