In simple terms, compound interest is interest earned on both your initial money (the principal) and the interest it has already earned.
This is different from simple interest, which only earns interest on the principal amount.
Think of it as your money working for you—and then the earnings of your money also start working.
A Simple Example
Let’s say you invest ₱10,000 in a savings or investment account that earns 10% per year:
- After 1 year, you’ll have ₱11,000 (₱10,000 + ₱1,000 interest).
- After 2 years, you’ll have ₱12,100. Why? Because the second year’s 10% is based on ₱11,000, not just the original ₱10,000.
- After 5 years, your money grows to about ₱16,105—without you adding anything.
That’s the magic of compounding.
Why Time is Your Best Friend
The earlier you start, the more powerful compound interest becomes.
Let’s compare two people:
- Juan starts investing ₱5,000 per year at age 25 and stops after 10 years.
- Pedro waits until age 35 and invests ₱5,000 per year until age 60.
Even though Pedro invests longer and more money, Juan often ends up with more at retirement—just because he started earlier.
Lesson? Start as soon as possible, even with small amounts.
Where Filipinos Can Use Compound Interest
Compound interest works best in places where your money can grow consistently. Here are some common options:
- Pag-IBIG MP2 – Dividends are compounded if you don’t withdraw yearly.
- Mutual Funds & UITFs – Earnings are reinvested and can grow over time.
- Stock Market (Long-term) – Dividends + capital gains can compound.
- Retirement Savings (PERA, SSS WISP Plus, etc.) – Designed to maximize compounding.
Even a simple time deposit or high-interest savings account benefits from compounding, though growth is slower compared to investments.
How to Maximize Compound Interest
Here are practical tips to make the most of compounding:
- Start Early: The earlier, the better.
- Be Consistent: Add regularly—monthly, quarterly, or yearly.
- Reinvest Earnings: Don’t withdraw interest or dividends. Let them roll over.
- Think Long Term: Compounding works best when you give it time.
The Bottom Line
Compound interest is proof that you don’t need to be rich to start building wealth. Even small amounts, if given enough time, can grow into something big.
As a Filipino, whether you’re an employee, OFW, or entrepreneur, the secret is simple: start today, be consistent, and let compounding do its job.
Blogger’s Corner
When I first learned about compound interest, it blew my mind. Imagine your money multiplying on its own while you sleep. The sad reality is that many Filipinos still rely only on savings accounts with tiny interest rates.
If you’re reading this, I hope this article serves as your wake-up call. Don’t wait for “the right time.” The right time was yesterday—the next best time is today.