The Power of Compound Interest
What is Compound Interest?
Compound interest is when earned interest is reinvested into the principle, or balance, of an account. The reinvested interest grows the account balance, which makes it earn even more interest. The more interest you earn, the more your account balance grows, the more interest you earn, etc. It’s a compounding cycle of growing money. You are essentially earning interest on your interest. This makes it a powerful tool for exponentially growing your money in savings accounts and investments. However, compound interest can work against you when applied to debts such as loans and credit card payments.
How Does it Work?
Compound interest depends on a few factors: initial principal, interest rate, and compounding periods.
The initial principal is the amount of money that the account begins with. For a savings account, it’s the amount that you initially deposit. If you’re borrowing money, it’s the total amount of the loan.
The interest rate is the percentage of your balance that you earn (or owe) every compounding period. Compound interest rates do not grow over time, but the amount of money you earn from them grows as your earned interest is reinvested into your account balance.
Compounding frequency is the frequency at which interest is credited to the account. Compounding frequencies can be daily, monthly, quarterly, yearly, or any other rate. The higher the frequency, the faster the account balance will grow.
Compound interest is also affected by additional deposits and withdrawals from the account. Let’s look at an example of how compound interest can grow your money.
You invest $1,000 into an account with an interest rate of 0.25 percent. You deposit an additional $50 per month into the account for 10 years. With an annual compounding frequency, your account balance will be $7,101.45 after 10 years.
Use our online savings calculator to determine how much money compound interest will earn you on your account.
How to Grow Your Money with Compound Interest
To take advantage of this powerful concept, invest in savings accounts early and often. Time is the greatest determinant for how much money compound interest will generate. The earlier you save, the more your interest will compound. Make regular deposits into your accounts to further grow your balance and increase its interest.
But remember that compound interest may also apply to loans and credit card payments. Remember to pay your bills on time and pay more than the minimum amount, if you can. This will prevent interest payments from snowballing.
Grow Your Money with SharePoint Credit Union
SharePoint Credit Union has been helping members make their money go farther for 90 years. As a financial cooperative, we can offer better rates on deposits and loans, making the power of compound interest even more potent. Ready to put your money to work for you? Contact us today to get started.
« Return to "Blog" Go to main navigation
