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Compound interest has a snowball effect on money that you invest or borrow: it accelerates your savings. Understanding compound interest can help you make good investment decisions. However, it also accelerates your debts, so a firm grasp of the concept can help you avoid bad debt situations.

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1. What is an Investment?

When you save money in your bank account, you are making an investment decision. Usually, your everyday bank account has a lower interest rate return than other accounts, but you choose to use it because you can easily access your money with minimal fees. Alternatively, you can make your money can work a bit harder for you by choosing a financial product that earns you a higher interest rate. You might choose a high-interest savings account or a term deposit. It’s usually more difficult to withdraw your money if you invest it for a higher return, and there are higher fees for doing so.

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