What is compound interest and why does it matter?
Compound interest is when the interest that accrues on an investment is added to the principal and then future interest accrues on the total amount. It is easiest to think about as interest on top of interest.
For example, let’s say you have $10,000 in an account that is earning you 7% in annual interest and you never contributed to the account ever again. Over the course of the first year, you would earn $700 giving you a new balance of $10,700. Now over the course of the second year, you would earn 7% on the new balance of $10,700 which would be $749. Now you are at a balance of $11,449. You can see if this were to happen in your account for a large amount of time, that even without adding in more money, your money can still be working for you.
Let’s say you left this money in the account for 10 years at the same 7% annual interest rate, you would have $19,671. If you left the money in that same amount for 30 years at the same 7% annual interest rate, you would have $76,122. This example shows you how important it is to start investing early. Even if you don’t have much to invest right away, just having it invested for the longer period can help you earn more money without lifting a finger.
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This hypothetical example is for illustration purposes only and is not intended to be representative of actual results or any specific investment, which will fluctuate in value. The determinations made by this example are not guarantees or projections, and no taxes or fees/expenses are included in the calculations which would reduce the figures shown. Please keep in mind that it is possible to lose money by investing and actual results will vary. (02/21)