n is the number of times the interest compounds each year.Here’s how you calculate compound interest: What Is the Formula for Compound Interest?Īll right, math nerds, it’s your time to shine. Contributes money until age 67 (a total of 37 years!)Īt age 67, Ben’s investment has grown to over $2.1 million, and Joey’s has grown to more than $1.2 million! Nine years made a difference of close to $1 million.(Note: Since mutual funds don’t earn a fixed rate of interest, we’re using the average annual return to calculate the compound growth of their investments.) Ben They picked good growth stock mutual funds that average an annual return of about 11%-just under the long-term growth rate of the S&P 500. To help you see the power of compounding in action, here's the story of Ben and Joey-two guys who got serious about investing for retirement. If you really want to build wealth, you have to get out of debt ( paying interest) before you start investing ( earning interest). He who doesn't, pays it.” The choice is yours. Remember our old pal, Albert Einstein? He also said this about compound interest: “He who understands it, earns it. That’s why we don’t want you to mess around with credit cards or any kind of consumer debt-once you fall into their trap, it’s hard to get out. Meanwhile, your lender is smiling all the way to the bank. Then your interest rate gets applied onto that new, larger amount. ![]() ![]() If you don’t pay your interest charges on time, they get added to your initial loan balance. Then, the next month’s interest is calculated based on that new, higher amount-which means you end up paying more and staying in debt longer.Īnd the same goes for other types of loans too-including student loans, car loans and personal loans. 1 And guess what? If you don’t pay enough to cover the month’s new interest, it’ll be added to your credit card balance. Your credit card charges interest on the balance on your card every single month-and the average interest rate (or annual percentage rate) on a credit card account is 16.65%. If you have credit card debt, brace yourself. Why? Because when you borrow money, it works against you and increases what you owe to your bank or lender. If you’re still trying to pay off debt, compound interest becomes your worst enemy. If you invest $10,000 with a 10% annual return and left it alone for 40 years. Interest can be compounded daily, weekly or yearly. The number of compounding periods will determine how quickly your investment grows. And remember, all you put in was $10,000! If we leave that $10,000 alone for 40 years, and it compounds annually at 10%, it will grow to over $452,000. Now, $12,100 doesn’t seem like a big deal at first, but it becomes a huge deal later. The investment compounds, or builds up, over time. The second year, you’d have slightly more-$12,100-because you’re earning interest on top of the interest you earned the year before. After one year, you’d have $11,000-the original money plus the $1,000 in interest you earned. Here’s an example: Let’s say you invest $10,000, and-just to keep it simple-it earns 10% a year in interest. If you leave that money alone (the initial principal plus the interest), compound interest applies the interest rate to the total new amount of money earned, so it builds exponentially over time. ![]() When you save and invest money, you expect to get a return on your money, meaning you should end up with more money than you originally put in. ![]() It’s your best friend as you continue to save and invest for the future, helping your money grow faster and faster over time. Market chaos, inflation, your future-work with a pro to navigate this stuff.Ĭompound interest is the secret sauce for building wealth, and it’s one of the most basic principles of investing.
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