Compound interest is a concept where the money you save
garners interest so that future interest is earned on your original investment
and the interest you have been accruing. The interest rate on your bank account
is really what the bank has agreed to pay you for the privilege of holding your
money. The bank pays you some interest every month, which accumulates on top of
your initial deposit and any ongoing contributions. Any interest earned is also
put to work and, therefore, the bank pays you interest on interest.
In this way, earning money with your money is easy, and
over time your interest income will grow and grow. The first step to using
compound interest successfully is committing to saving a fixed amount from each
paycheck. Even if it’s only $50 or $100, regular deposits into a savings
account will add up. Financial websites like Bankrate.com can help you
find the banks and interest rates that are best for you. The three key features
of a good savings account are: no fees, high interest, and easy access to your
money. Luckily for you, there are lots of banks offering attractive and free
savings accounts, especially online. Make sure that the bank you choose is a
member of the FDIC, so your deposits are insured by the government. And
remember that while bank accounts are FDIC-protected, investments like stocks
and bonds are not.
Visualizing How Money Can Grow Through the Power of
Compounding
Let’s assume that you are 24 years old. You commit to
saving $160 per month. After comparing banks online, you find a savings account
that pays 1% APY (Annual Percentage Yield). That $160/month will grow to $97,341
by the time you’re 65—and about one-fifth will have been earned from interest.
You can explore the growth of money at all ages, saving and interest rate
scenarios.
Using the Power of Compounding to Become a Millionaire…
To become a millionaire by the time you retire, you need
to start saving early. The sooner you start, the better off you’ll
be. Bankrate.com has a great Personal Finance
calculator that will
answer the question, “How long until you’re a millionaire?”
Saving Tips
·
Commit to
savings today! Spend less than you earn and put the difference in a
savings account.
·
Research your
options. There are different types of savings options. They differ
by degrees of risk and reward. A standard savings account allows
regularly scheduled deposits and permits withdrawals at any time. Interest
rates are relatively low but there is no risk of losing your savings. This choice
offers the most liquidity (easy access to cash) among all savings options. A
certificate of deposit, or CD, may offer a higher rate of interest than a
savings account. However, putting your money in a CD makes it inaccessible for
the length of the deposit. In an emergency you can withdraw money from a CD,
but you’ll pay a penalty and lose any interest payments. Like checking and
savings accounts, CDs are usually FDIC-insured. To earn higher rates of return
while taking on more risk, other assets like stocks, mutual funds and options
can be considered.
·
A good
savings account is intended to meet short term goals. These goals include, but
are not limited to, covering emergency expenses, buying a car, and making other
big purchases. It can also include helping others through charitable
contributions.
·
Once you have
achieved your targeted principal amount explore investing. Deposits placed in
other types of investment vehicles will promise a higher rate of return but
they do involve more risk than a savings account. Additionally, deposits are
not usually insured against loss.
christopher.x.chapman@gmail.com
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