Most consumers deposit their cash into a checking and/or savings account, where the money earns very little, if any, return. But you don't have to settle for average. You can learn how to invest well and wisely, putting your money to work on your behalf. The first step is understanding compound interest.
What is compound interest?
Unlike simple interest, which is earned only on your principal, compound interest is interest earned on top of interest. It can dramatically increase the growth of your savings.
For example, if you invest $1,000 into an account that pays a compounding interest of 5.0% annually, at the end of the first year you’ll have $1,050. During the second year, you’ll be earning 5.0% on $1,050. At the end of the second year, you’ll have $1,102.50. After 20 years, without additional money put into the account, you’d have $2,653.30 (compared to $2,000.00 if you had only earned simple interest).
On the other hand, if you continued to add money to the account you’d earn even more. Just $500 per year contributed over the course of 20 years at 5% would grow to $20,012.92.
How to calculate compound interest
Investment experts often use extensive charts and tables to help them quickly calculate compound interest, but there is a quick, easy calculation anybody can do. It’s called the rule of 72, and it tells you how many years it will take to double your money at any given interest rate.
Simply take 72 and divide it by your rate. The result is the approximate number of years required to double your investment.
For example, if you’re earning 5%, simple divide 72 by 5, which is 14.4. That means you can expect to wait a little over 14 years to double the amount of money you initially invest, if it continues to earn 5%.
For your convenience, check out our easy investment calculators. You may be surprised at how quickly your money can grow.
Compound interest and debt
Albert Einstein purportedly said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Interest compounds on debts you owe, just like it does on investments; however, with a debt, you are the one paying the interest. The compounding can be especially damaging to your bottom line if the debt is on a high-interest credit card. For this reason, it's recommended to avoid high-interest debt altogether. If you're already in debt, do your best to pay more than just the minimum payment each month. In this way, you’ll drastically reduce the total amount of interest paid and be able to get out of debt faster.
Need help finding extra cash? Download 52 Ways to Save.
How do I get started investing?
Anyone can invest. It's as simple as opening an account and depositing funds. Then sit back and watch them grow. With compound interest, time is on your side.
Take the first step today by opening an AGFinancial investment, or call 866.621.1787 for more information.
