compound interest
Also called: bunga berbunga
Interest calculated also on the previous period's interest, so the balance grows faster.
What it means
Compound interest is interest calculated on the principal plus interest that has already accumulated. This means the interest itself earns interest in the next period, so the balance grows faster than with simple interest. This concept applies both to savings and to loans whose interest is not paid regularly.
Why it matters for families
For savings and investments, compound interest helps a family grow long-term funds such as an education fund. Conversely, on debt that is not paid off promptly, compound interest makes the obligation swell. Understanding the direction of the effect matters so a family does not misjudge the impact of delaying payment.
Example
For example, a family saves Rp1 million at 6 percent compound interest per year. After several years, the balance grows not only from deposits but also from interest already added. The interest rate assumption and time must be checked because results can differ.
Common misunderstanding
Some people think compound interest only benefits savers. The correction: compound interest also enlarges debt if interest is not paid and is left to pile up.