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When Benjamin Franklin died in 1790, he left $5,000 each to the cities of Boston and Philadelphia. Each city was to create a fund that would last for 200 years. The needy could borrow from the fund at 5% interest. After 100 years, each city could withdraw $500,000 from the fund, leaving the rest to work for the next 100 years. Why did Franklin do it? To help people understand the importance of compound interest.

What is compound interest? It's interest earning interest. Suppose you banked $100 a year ago, and it has since earned $2 in interest. This year, you'll be earning interest on $102 (original savings plus the interest earned). That might not seem like much, but understanding that simple process can have a major impact on your financial success.

Why is compound interest so important? Because it can turn just a few dollars today into big money over the course of a lifetime. Here’s a look at 10 things you need to know about compound interest:

1. Anyone can benefit from compound interest. There’s no need to be a Wall Street wizard or a Harvard MBA. Almost any investment will earn compound interest if you leave earnings in the account.

2. Compound interest is a double-edged sword. It's great if you're routinely saving money, but it can be cruel if you're borrowing money.

3. You want savings to compound as often as possible. It's better for your savings to compound quarterly than annually. If you're borrowing, just the opposite applies.

4. For savings, time is on your side. The longer money compounds, the faster it grows. Money growing at 6% per year will double in about 12 years, but it will be worth four times as much in 24 years.

5. For debts, time is not on your side. Credit cards and other open-ended accounts use compound interest against you. That's why making only minimum payments is likely to keep you in debt forever.

6. Today's low interest rates shouldn’t discourage you. It's true that banks aren't paying much on savings accounts these days. But many mutual funds average a higher return and have very low minimums and no sales charges. If you can't tuck away a few dollars a month in savings, try paying down what you owe faster. Most debts (think home loans or credit cards) will allow you to add any amount above your minimum payment.

7. It adds up faster than you think. If you were to save $5 per month for 10 years, you'd have put $600 into savings. But if you were to earn 5% interest compounded each month on that account, your savings would be $776 at the end of that decade. And even if you didn't add a single dime after that, 15 years later, the account would be worth more than $1,500.

8. Compound interest can free you from credit card debt. Suppose your interest rate is 14% and you add just $5 per month to your payment. In 10 years, you will have avoided $1,315 in payments.

9. You don't have to be rich to make compound interest work for you. The principle works the same whether you invest $100 or $100 million. A millionaire may have more investment options, but even if you have only a modest income, you can use compound interest to build a bigger nest egg or reduce the amount you pay credit card companies.

10. With compound interest, the sacrifice is smaller than the benefit. To save a few dollars today, you’ll have to say no to some purchases. But it's certain that the future reward will be greater than the sacrifice.

The bottom line for consumers: Often the difference between financial comfort and poverty isn't that great. Saving a few dollars a week might not seem like much, but if you do it consistently, you could be making a big difference in your financial future.

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