Are You Taking Advantage of Compound Interest?
It’s a fact that many Americans just are not saving enough for retirement. And while just saving money in general can help, there is one specific factor that can help more than anything: Compound Interest.
While interest is vital to growing our investments, it is important to understand and differentiate between compound and simple interest. With simple interest, you earn a percentage of the principal amount each year. With compound interest, in addition to the percentage you earn from the principal, you also receive a return on the accumulated interest from previous periods. Simply put, compound interest earns you more money over time.
Below, you will find a graph depicting the growth of two bank accounts with starting principals of $100, one with a simple interest of 8% a year and one with a compound interest of 8% a year.
As you can see, the account that receives compound interest grows at an exponential rate versus a fixed rate. At the end of 40 years, the compound interest account has turned into almost $4000. Meanwhile, the simple interest account has only grown to around $500.
The value of compound interest is undeniable. However, still many people are not taking advantage of this at a younger age. Saving early can make a big difference, and allows you to invest less and achieve a higher return. Compound interest is key to helping you retire on your terms.