Money That “Works for You”: What to Know About Compound Interest

Money That “Works for You”: What to Know About Compound Interest

When you were a kid, did you ever save quarters in a jar? Or set aside a portion of your allowance in a piggy bank for a big purchase, like a bicycle, a pair of designer shoes, or anything that mom said “no” to buying?
As useful as those tools are for teaching good budgeting habits, the reality of saving money – and making the most of your financial potential – is more complicated. That’s mainly because of interest, or the money you earn when you deposit funds into a savings account or purchase an investment.

For example, let’s say you deposit $100 into an account offering 5% (it’s an easy, whole number to use for the purpose of this explanation) interest, compounded annually. By the end of the first year, you’ve earned $5 (or 5% of $100) in interest, for a total of $105.
But this is only the beginning. Next year, you collect interest on the total balance of $105 (not just the original deposit of $100), earning you $5.25. As the process is repeated year after year, interest continues to grow.
Interest is an important tool in your financial portfolio. But what’s the best way to make your money work for you?

Don’t wait to get started. The compound interest income becomes more powerful the longer your money stays in the account. That’s why – even if you don’t have much to save – it’s still better to start now than later.

The sooner you start saving, the more your money can increase in value.

Don’t dip into your savings.

Repatriation isn’t just about pulling in a dollar here and there—it also reduces your earning power. What if you only withdrew $5 a year from a compound interest account?
It may not seem like much of a difference, but no matter how many years you leave your money in this account, you will never have more than $100. That’s why the best way to make money work for you is to leave it alone.

Share where you can.

Compounding doesn’t happen overnight, but if you can donate even a small amount regularly, you’ll notice your personal wealth grow. Let’s say you add $5 to your account each month in addition to your $100 deposit. Over 50 years – including compound interest – your balance will grow to over $13,700!

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