"The information provided on this blog is for general informational purposes only. It is not intended as professional financial advice. Please consult a professional before making any major financial decisions".
Well, compound interest is interest that applies to your initial investment and any profits from your investment. This may sound confusing at first, but this is actually a simple concept once broken down.
Why Invest Early:
The key to compound interest is time. The longer your money is invested, the greater the effects of compounding. This is why you should start saving for a house or retirement sooner rather than later.
For Example:
A sum of 5000$ is invested for 3 years with an average return rate of 5%. After the first year, you would have 5250$, an extra 250$. After the second year, you would have 5512$(5250$*1.05). You gained 262$ in the second year whereas you only gained 250$ in the first year. Over 10 years, your initial 5000$ investment would be worth 8235$! This shows how big of a difference time can make.
There are many ways to compound your money. Here are a few:
1. High Yield Saving Account:
High-yield savings accounts usually do not require any minimum balance and tend to pay higher interest rates than a regular savings account. The great thing is numerous banks offer them and they are
FDIC insured. This is a very risk-free way to grow your money.
FDIC insured. This is a very risk-free way to grow your money.
2. Certificate Of Deposits(CDs):
A CD is a savings account that locks your money for a fixed term(a few months to several years) in exchange for a guaranteed rate. It is also FDIC-insured. The downside is you have to leave the money invested for the term's duration. Interest is paid out periodically or at the end of the term. If reinvested, this compounds your return.
Bottom Line:
Compounding is all about time. The earlier you start, the longer your money compounds. The key is to be patient and keep reinvesting. It may take a while but it is well worth it.
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