If you ask people what are some of the greatest discoveries in history, I am sure they will leave one which helps your family off the list. This is a discovery that allows your money to go to work for you. While this sounds like a great thing, the fact that so many people are barely making ends meet nowadays means that they have completely forgotten about compound interest.
That’s right, compound interest, that miracle of mathematics which helps your money to grow when it is invested wisely. What makes it so powerful is that you don’t need to be a rocket scientist to figure out how it works. But just in case you aren’t up to speed on compound interest here is some more information on the miracle that it represents and how it helps you and your family.
How Compound Interest Works
As mentioned, you don’t need to be a rocket scientist to understand compound interest. In fact, it is really, simple – you place your money in an account and as interest is paid on your money, it grows over time. This means that after the first year you will have the money you placed in the account plus the interest.
Now, if you keep this money in the account for 10 years, you will have the original deposit plus 10-years of interest. But here is the miracle, the interest is accrued is not just on the original deposit but also the previous years’ interest.
Imagine you put $100 in an account and it paid 5 percent interest every year. After the first year, you would have $105, after the second year the total would grow to $110.25. Fast word to year 10 and you would have nearly $163. That’s a return of 62.8 percent!
This is what our grandparents did when they came back from World War II. They scrimped and saved, putting their money in interest-bearing accounts and then let their money go to work for them. Imagine that $100 was $1,000 and instead of keeping it in an account for 10 years, it was invested for 30 years – the total would be $4,322.
While that might not sound like a lot, but now imagine that you were able to add another $1,000 to the account every year. By the end of 30 years, you would have $70,761 in the account. This is the power of compounding interest as you are almost doubling the $30,000 invested over time.
How to Make Compounding Interest Work for You
First, don’t get overwhelmed. Most of us don’t have an extra $1,000 lying around. As such, the first goal should be to either cut back on expenses, find new sources of income, or do both. Perfect sources of additional income include freelancing or to set up a home-based business.
For example, you could get set up a business to sell car part. In this way, you could sell any old cars you have or get your hand of the cars of other people. Heck, you might even be able to help me sell my car for parts.
Once you have a small nest egg, the next step is to start putting it in an account that will pay a reasonable amount of interest on the money you invest. With that in mind, here are three tips to get the most from your money.
- Start early and keep adding to your account. If possible, you want to make saving a habitand as such, you want to get into the swing of things as early as possible. This means while you are in high school or as soon as you get a job.
- Put as much money as possible away. For some people, this might be only $10 a week, but it doesn’t matter. Put away what you can and let your money go to work for you. As you see saving is all about getting into the habit and as such if all you have is $10, then this is where you want to start. Remember, a penny saved is a penny earned.
- Don’t break in case of emergency. In fact, this is the most important lesson when it comes to getting your money to work for you – leave it alone. Sure, there will be temptations and there will be times when you really want to use the money in your savings for some extravagance but the reality is that you will need this money when you are retired. As such, let it be and watch it grow.
This is how compound interest can work for you and your family.