A nickel here and a dime there can add up big over time. Just $20 a week can earn $5,980.77 in five years, assuming you earn 7-percent interest. After 30 years, you’d earn $98,239.22. How? With compound interest.
Economists describe compound interest as interest earned on the starting amount plus the built-up interest, over a period of time. Khan Academy produced an easily-to-understand video explaining the concept.
Albert Einstein called it “the most powerful force in the world.”Compound interest can work for or against you.
Case in point, let’s says you ignore a $1,000 credit card bill for four months. Compound interest causes that that payment to balloon to $1893.18, assuming you’re charged 17.3 percent interest.
Use compound interest to your advantage by investing in assets (stocks, bonds, real estate, etc.) that grow in value.
For example, if you put a $1,000 one-time investment in an index fund. After five years, you would earn $1,402.55, assuming you earn 7 percent interest.
Let take it a step further. We keep the $1,000 in the index fund. Plus, add $25 every pay period. After five years, you would earn $ 9,401.83, earning the same 7 percent interest.
You deserve a comfortable future. Invest now and enjoy the benefits of compound interest.
MoneyChimp.com has an online calculator that allows you to see how much compound interest you can earn over a period of time.