Compound
interest is
interest that is paid on the principal amount saved in an account, as well as on
the interest that accumulates from it. So, essentially, you earn interest not
only on the amount you deposit in a savings account, but also on all the
interest it has earned previously. (That assumes you don't take out any money
from the account, of course!)
Compound
interest is one of the most powerful personal finance tools you can put to work
for you throughout your life. That’s because the longer you save money, the
more it can grow in value. Want proof? Check out the example below.
The Power of Compound Interest
Do you
think you could earn more in a job that pays $1,000 a day for 35 days or one
that pays one penny the first day and then doubles the amount every day for 35
days? Let's compare the amount you’d acquire in each scenario:
|
Day
|
Job Option No. 1
|
Job Option No. 2
|
|
1
|
$1,000
|
$.01
|
|
2
|
$2,000
|
$.02
|
|
5
|
$5,000
|
$.16
|
|
10
|
$10,000
|
$5.10
|
|
15
|
$15,000
|
$163.20
|
|
20
|
$20,000
|
$5,200
|
|
25
|
$25,000
|
$165,750
|
|
30
|
$30,000
|
$5,304,000 (yes, million!)
|
|
35
|
$35,000
|
$169,728,000
|
Amazing,
isn't it? This example is exaggerated because no one can earn 100 percent interest on
their money (doubling your money every day equals a 100 percent return rate every
day). Still, it demonstrates the power of how saving early and letting interest
compound will reward you over the long term.
Even Small Savings Add Up
If you
don't think it's worth it to try to save a few dollars every week, take a look
at how quickly it can add up:
|
Amount saved each
week
|
Total at the end of
one month
|
Total at the end of
one year
|
|
$5.00
|
$20.00
|
$260.00
|
|
$10.00
|
$40.00
|
$520.00
|
|
$15.00
|
$60.00
|
$780.00
|
Click
here
to calculate your own compound interest scenario, and get saving!