Dollars & Sense

How compound interest can change your life–really!

Compound interest is a powerful income-generating, wealth-building tool that can substantially impact your financial future. According to ValuePenguin, who asked 2,000 Americans if they could accurately define some financial terms like net worth, credit score, and compound interest, nearly 70 percent of Americans had to ask Siri for help. Let’s see if we can fix that.

Simple vs. compound interest

There are two different types of interest: simple and compound. Simple interest is interest earned on only the principal amount of your investment. Consider a certificate of deposit (CD), for example. At the end of the term, you’ll receive your initial investment amount plus a fixed amount of interest.

Compound interest, on the other hand, is interest earned on interest, and it’s the quickest way to bump up your balance. Each period’s interest (daily, monthly, quarterly, or annually) is earned on the initial amount of your investment plus all the previously accumulated interest.

Invest sooner than later

You don’t need to be a mathematical whiz to benefit from compounding interest. When you’re saving or investing money, compound interest will continually give you a financial boost.

Put your money to work

Compound interest works the same way, regardless of the amount of money you invest, and it adds up faster than you think. Compounding interest can be an important component of your overall financial strategy. It’s ideal for investors with longer time horizons, but it also works for investors who’ve gotten a late start saving for their future. Whatever your situation, don’t wait another day. Put your money to work now and take advantage of the power of compounding.

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