The Magic of Compound Interest

Compound interest is a beautiful thing when it is working for you and not against you. For example: your credit card or student loan is based on compound interest. When you look at your total loan amount and see it’s higher than when you started that is compound interest working against you. *Balls up credit card statement and throws it on the ground* Now imagine if it worked for you and it was profitable. Just like one of America’s most hated companies, Sallie Mae, you could profit off of lending (saving) your money to a bank and letting interest build up.

For my math people compound interest is calculated on the initial principle and also on the accumulated interest of periods of a deposit or loan.  If you want to get even more technical here is the formula:

For my less math savvy people here is the basic breakdown of how it works. By saving your money in a regular savings account, your end amount will be whatever you put in that account. On the other hand by saving your money in a compound interest account your end amount will be whatever you put in + the interest your money has earned. It is a superb tactic to make your money work for you and it works best when you start young. It is downright passive income (my favorite kind) and it only takes a short amount of time to set up an account.

Story Time:

Two brothers Scott & Alex Summers both put their savings of $5,000 into savings account. The only difference is Alex put his money into a compound interest account for %1 APR . Both brothers do not add or take out any money from their initial deposit. Thirty years later they go to the bank and withdraw their money. Scott is happy to have his $5,000 safe and sound, no hiccups or anything and he goes about his day. Alex is of course happier because he received $6,739 ($1,739 extra for his compound interest). Just by picking the right savings account Alex earned more money and made his money work for him.

Don’t be like Scott Summers and lose out on easy money!!! Search for a bank that you trust that offers compound interest in their savings account. It is an outstanding long-term savings tool and I suggest monthly contributions to help your investment grow.

Here are three tips to start you on your way:
  1. The sooner the better. When it comes to compound interest time is on your side and it allows your money to keep building. Take advantage of the time you have, you won’t get any more.
  2. Contribute monthly. Unless you have thousands of dollars lying around it may be quite the task to get a decent amount in your account to save. But by paying monthly it will grow gradually and build up more interest. And it doesn’t matter what amount you contribute just get it started. You can start at $10 a month and increase your contribution annually or do large lump deposits.
  3. Pick the right bank for you. Take your time and pick the best bank to fit your needs. For me I choose Ally Bank because they have the industry standard of 1% APR and it’s online so I can’t easily withdraw my money.
    Write down what features you want in your bank and pick your favorite.

Click here to play with the calculator and see what you are comfortable with and take action on it. Don’t wait because time is your best friend.

For more information on compound interest view the video below by one of my favorite websites, Investopedia. Chat with us anytime and don’t forget to subscribe!

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