Still Don’t Believe In The Power Of Compound Interest?

Compound interest: the eighth wonder of the world. Most people ‘discount’ it—especially when considering their own initial investments—but the truth is, compound interest remains the most powerful method to grow your money, especially when compounded annually in investment accounts.

In fact, understanding the compound interest formula and its annual percentage yield is the best strategy if you’re aiming to build long-term wealth through financial research.

In this article, we’ll cover compound interest, its advantages, & how to get started.

1. Compound interest allows your money to grow exponentially.

the power of compound interest, savings accounts

Although this might seem like a financial scheme at first, compound interest is validated by financial research as one of the few strategies that effectively harness the power of compounding. When you allow your initial principal to grow through compound interest, it benefits from the exponential growth potential, increasing at an accelerated rate when compounded monthly. Over previous periods, this strategy can yield total earnings that make a massive difference in your wealth, showcasing the compound growth.

For illustrative purposes, if you invested $10,000 at an annual interest rate of 8% and left it untouched for 20 years, it would grow to more than $46,000, a calculation easily verified using an online calculator. This is because the interest you earn each year is added to your original investment - your investment earns interest on its interest.

2. Compound interest can help you achieve your financial goals quicker.

Let's face it; no one ever got rich by putting their money into a low-interest rate savings account, unless they benefited from a substantial initial investment from a wealthy family. To earn interest and grow your money, you need to begin investing it, despite the inherent risk tolerance required. And the sooner you start investing, the better.

Thanks to compound interest, your money starts working for you right away—literally the second it’s put into an investment account—and over time it’ll only leverage the power of compound to grow faster. So if you're aiming to achieve a certain financial goal, understanding the annual percentage rate and accrued interest of compound interest can help you get there quicker.

3. Compound interest can help you overcome inflation.

present value, interest rates

Every year, the cost of goods and services typically rises by a few percentage points. This phenomenon is known as inflation. In order to maintain your purchasing power, you need your savings to grow at least as fast as inflation. Compound interest lets you do this, giving you a significant advantage over the long run.

Before we proceed…

If you’re earning compound interest, it becomes crucial to understand how much tax you’ll owe on that income. This is because different types of wealth are taxed at different rates.

You can easily determine how much tax is due on your investment income by using a tax calculator, reading about common tax myths, or generating your 1099 form online.

Where can I put my money to earn compound interest?

money makes, makes money

1. High-yield savings account. This type of savings account offers the best compounded returns on your investment, and it’s also very safe, a key factor when you start saving in a brokerage account. You can typically find these accounts at online banks or credit unions, often utilizing platforms like Microsoft Excel for calculating compound interest and managing interest calculated over various time intervals.

2. Certificate of deposit. This type of savings account offers a higher interest rate than a regular savings account, effectively earning interest at a rate that accelerates your future value through the power of compounding interest. However, you can't withdraw money from a CD until the end of the term, which spans time intervals from six months to five years, a detail critical when you calculate compound interest on your principal amount.

3. Money market account. This savings account typically offers a higher interest rate in return for depositing a larger minimum balance, an enticing option for those looking to earn more interest and grow their total interest over time. Money market accounts also offer limited check-writing privileges and the ability to use a debit card.

4. Checking account. The interest rate on a checking account is usually lower than the interest rate on a savings account or certificate of deposit (CD), making it less attractive for those aiming to earn interest and capitalize on interest charged over time. However, many banks offer bonuses for signing up for a checking account, and some offer no-fee checking accounts, often promoted through their Schwab Center to attract customers looking for simple definitions of banking products.

5. Treasury bills. T-bills are short-term government bonds that usually mature in three, six, or twelve months. They are backed by the full faith and credit of the United States government, so they are very safe investments, suitable for inclusion in a hypothetical portfolio that demonstrates investing involves risk but can be mitigated.

6. Short-term bonds. These are bonds that will mature in one to three years. The longer the maturity date, the higher the interest rate.

7. Riskier options. You can also consider investing in stocks or stock mutual funds, buying bonds or bond mutual funds, and starting a small business, all activities that reflect investing involves risk but can lead to significant earnings if managed well. However, these are all relatively high-risk investments, so be sure to do your research before investing any money.

Compound Interest vs Simple Interest

Simple interest is a form of investment in which you only earn interest on your original investment, a simple definition that contrasts sharply with how compound interest works to grow small amounts rapidly. This means that even if you left $10,000 in an 8% simple interest account for 20 years, you would only ever accumulate $13,200 - a whopping difference compared to our prior example.

Meanwhile, compound interest is a powerful tool that can help your money grow faster than if it were invested with simple interest. This occurs because you not only earn interest on your original investment but also on the accumulated interest. As a result, compound interest is an excellent way to build your savings over time.

Final Words

It's hard to overstate the power of compound interest. In the long run, it can turn even small sums of money into fortunes. If you're not taking advantage of compound interest, start today! Review your budget, savings plan, and get started on the road to financial security.

Blog Post FAQ

Creating a paystub on PayStubsNow is a simple, straightforward process. First, you'll need to access our website and select the 'Create Paystub' option. Next, you'll input the necessary information such as employee details and salary data. Once the information is entered and confirmed, press 'Submit' and how to make a pay stub is taken care of. Your generated pay stub will be ready to download for your convenience.

Yes, you can easily obtain your pay stub through Paystubsnow.com. Once you navigate to the website, you have the ability to customize and generate your own pay stub. This can be done by filling out your information in the required fields, paying a small service fee and then downloading your document. Getting a clear and accurate pay stub allows you to see how your earned income compounds over time, demonstrating the power of compound interest.

Utilizing the power of compound interest is invaluable in wealth creation and financial planning. Similarly, to simplify and streamline your earning records, you can use PaystubsNow to get pay stub online. With this service, you can generate customized, professional pay stubs efficiently and conveniently. This allows you an easy way to keep track of your income, which is essential for proper financial management and taking advantage of compound interest.

Absolutely! A paystub can be of great help when calculating compound interest on your investments. The paystub provides information about your monthly earnings which is the base figure used in the calculation. With this knowledge, you can better plan your savings and understand the potential yield from your investments over time due to the power of compound interest.