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The Power of Compound Interest

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.

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

Calculate your own compound interest scenario, and get saving!

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