You’ve heard the name before and you might know a little about what it is, but it’s time to take a little closer look at this amazing tool you could be using to increase your hard-earned money into something more. If you were lost before, hopefully this quick guide should answer some questions or get you thinking about how to utilize it in your life for maximum benefit.
What Is It?
First, it’s best to understand what simple interest is. Simple interest is money you make on an investment as a percentage of the upfront investment. In this situation the interest amount received remains constant over the life of the investment. Compound interest on the other hand allows the investment to make money on the original investment plus the interest earned along the way. In basic math, if you invested $100, and your interest rate is 10% annually, you’d earn $10 every year with simple interest, and it always stays at $10. With compound interest at 10%, you are earning your $10 this year, but next year you will be earning 10% on $110, so it would be more.
Interest Rate
While it’s always wise to shop around and get the best interest rate, sometimes it is out of your control. Especially when it comes to 401K options and banks. Interest rates have a lot to do with how your investment matures, but don’t get too caught up in the minutia of finding the best rate out there.
Time is Of the Essence
The sooner you start saving, the more time interest can accrue, which equates to more money you will have in your pocket or retirement account. The most important element in your control is when you start saving. For example, if you start saving for your retirement with $1000 at age 20 with a 5% interest rate, by the time you are 65 years old, you will have nearly nine times your initial investment. Comparatively, if you put off saving that same $1000 until you were 30 years old, you would only have five and a half times as much. While this seems overwhelming, trying to save even a little as soon as possible will benefit you. Try even taking small steps to save a little more each month to put towards your future.
The Snowball Effect
Compound interest is always the way to go. It is like a snowball that keeps accumulating as time goes on. The more money you put into it along with the interest rate you receive, and the amount of time that goes by, determines how big the snowball can get. This is how ultra-rich people can live off the interest alone that they accumulate.
Building towards your future is important and helpful. It’s easy to forget about saving money and being responsible in the now, but it will help you out further down the line when it matters. Take an interest in your future today.