I’m happy to report that the magic ofcompound interest helpedme reach my goal.
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Compound interestcan be both good and bad.
When we understand compound interest, we can make better decisions about how to save and spend money.
That’s how I doubled my savings in just one year without lifting a finger.
Understanding compound interest
First, let’s get our definitions straight.
Albert Einstein famously referred to compound interest as “the eighth wonder of the world.”
Anyone who understands compound interest, earns it.
Anyone who doesn’t understand compound interest, pays it.
Your interest also earns interest, therefore growing your account balance.
In contrast, simple interest applies to the principal only.
In other words, compound interest is a powerful and simple way to increase the value of your savings.
But you’ll need the rightsavings account,money market accountor investment tool, like acertificate of deposit.
Look for the percentage attached to the APY, or the annual percentage yield.
The higher the balance in an account, the more you’ll earn in interest.
Say you deposit $10,000 into that same high-yield account with a 5% APY compounding daily.
You’ll have roughly $10,513 after the end of one year.
That breaks down to almost $43 extra cash each month toward your savings goal.
Today, Ally’s HYSA earns a 4.00% APY.
You don’t need to set aside $100,000 to make noticeable gains with your savings.
Here’s what to do.
Automating your contributions is a way to “set it and forget it.”
Luckily, savings rates won’t plummet overnight.
Interest compounding daily vs. monthly
How frequently your interest compounds determines how quickly your principal balance grows.
Banks and credit unions can compound interest annually, monthly or daily.
Most high-yield savings accounts compound interest daily and pay it out monthly.
Keep in mind that any interest you earn from a savings account is considered taxable income by the IRS.
If you want to boost your wealth significantly, thissavings strategymight be too “G-rated” for you.
It’s all about finding the right balance for your financial situation.
Take advantage of the power of compound interest while APYs on savings accounts are high.
The sooner you do, the more interest you’ll earn.
