Compounding Interest: For You or Against You?

Compound Interest is simply earning interest today on the interest you earned yesterday. It is important to note that interest can be compounded annually, monthly or daily, which means you earn interest on whatever amount you have at the end of that time period.

Here’s a powerful example of how the numbers work:

Say you invest $2,000 a year for 10 years from the time you’re 25 until you’re 35. Then you stopped adding additional funds and let the money compound at 10 percent for the next 28 years until you’re 63. You’ll have accumulated a nice little nest egg of $505,629 after contributing only $20,000 and letting the magic of compounding work for you.

Who Wants to Be a Millionaire
Realize that the longer you keep your money compounding, the effect is exponentially greater. For example, if you save $2,000 a year at 10% interest, you’ll have accumulated more than $35,000 after just 10 years. That’s $15,000 in interest earned!

And if you keep investing that $2000/year for another 10 years (double the amount of years), you’ll have far more than double the amount, you’ll have accumulated a nice $126,000!

And it gets even better when you continue this practice for another 10 years, after 30 years you’ll accumulate about $362,000. Now hang in there for just 10 more years and you are just a few dollars short of being a millionaire with approximately $973,700!

Taking Advantage of Compounding Interest

  1. Start investing as early as you can.
  2. Get the highest interest rate, or rate of return, you can find with daily compounding if possible.
  3. Set a monthly amount to invest and treat it as a fixed monthly expense in your budget.
  4. Don’t withdraw money out of retirement accounts until you have reached 59 1/2 to avoid being charged early withdrawal penalties.
  5. Try to make the maximum allowable contribution every year.

Get started today reaping the incredible rewards of compound interest. Also keep in mind that compounding interest can be the bad guy if you have credit card and other interest-bearing debt. Look at the numbers again but realize those interest dollars are flowing out of your account instead of in. The credit card companies are making a fortune using compounding interest to get very wealthy.

Sample Compounding Chart:

Principal = $1,000 – Interest Rate = 5% – Time = 10 years

 

Time Period

Beginning Balance

Interest Earned

Ending Balance

Year 1

1000.00

50.00

1050.00

Year 2

1050.00

52.50

1102.50

Year 3

1102.50

55.13

1157.63

Year 4

1157.63

57.88

1215.51

Year 5

1215.51

60.78

1276.28

Year 6

1276.28

63.81

1340.10

Year 7

1340.10

67.00

1407.10

Year 8

1407.10

70.36

1477.46

Year 9

1477.46

73.87

1551.33

Year 10

1551.33

77.57

1628.89

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