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What is compound interest?
How to take advantage of the compounding system for your savings and investment plans
Compound interest refers to “interest on interest” where you gain profit through an investment and continue or start another investment with that earning. As compared to simple interest, compound interest helps to grow your money at a faster rate.
Depending on its frequency, the shorter the compounding period, the higher the compound interest will be. Understanding the compound interest rate will help you to save better, especially when you have to take inflation rate into account.
Here are several facts about compound interest that you might be interested in.
Beneficial for anyone
Just like savings, anyone can benefit from compound interest. As long as you do not withdraw from your interest or savings plan, the earnings will compound over the years.
This helps you to get back a higher amount of returns than your principal sum.
Short period
Go for quarterly compounding period than annual ones as you would want your savings to compound on a shorter period.
However, if you’re on a bank loan, you would want to look out for those that has a longer compounding duration. For borrowers, a higher compounding period means returning a higher amount back to the bank.
Long time frame
When going for a savings plan, it’s best to start early and allow the compound interest to accumulate over a longer period. A longer compound duration helps to grow your money faster, especially when you are planning for retirement.
If you only set a short period for retirement saving, you might miss out on the advantages of compound interest. The earlier you start saving for retirement, the more benefits your savings can earn with compound interest. Make use of your working years to grow your finances especially when you’re in 30’s.
Inflation
Inflation rate decreases the value of your money. It is estimated to range between 3 – 4 percent a year. Look out for saving plans that generate a high yield in order to counter the inflation rate. With a higher yield, it complements the interest rates and allows your money to generate at a faster pace.
For a better future
To reap the most out of compound interest, you should really start saving now. However, it does not mean you would not have resources to enjoy life. Set a budget for your expenses and the amount you want to save every month. The longer the money sits in the savings account, the more beneficial it is with compound interest.
By practicing the habit to save or invest now, certain sacrifices have to be made but future rewards will be worth it.
