The Magic of Compound Interest

Compound interest is the magic ingredient in any financial plan.  But what exactly is compound interest?

Compound interest is interest paid on an investment; that interest is then added to your original investment (reinvested) and earns interest thereby earning you interest on your interest. This is very powerful stuff especially if you get paid interest every month.
Here is an example:

You make a lump sum investment of $5000 and receive 10% interest compounded monthly (every month your interest is added to your initial $5000 thereby becoming available to earn interest) this is what your investment will look like in:

10 years = $13,535
20 years = $36,640
45 years = $441,770

Now the key to the whole thing is to keep adding your interest earned back into your savings account so that it can also earn interest.  Most investment and savings accounts will do this automatically but be sure to ask and make sure.

In todays markets you'll be hard pressed to find a savings account (mutual, bond or otherwise) that will pay 10% interest.  Don't let this be an excuse for not saving.  Shop around and find an account with a high interest rate that is compounded regularily.  FYI - those fractions of a percentage point make a difference!

Remember to research, research and research some more.  Go online to your bank site then armed with a general understanding of your options head into the bank and talk to an account manager.

You're going to find that most of the high interest accounts won't be available to you because of your age (assuming you are a minor).  Keep researching.  Find the account you want to place your money into.  Make sure you have a VERY good understanding of how that account works and the risks involved then go see your parents.

Prove to your parents that this is the best place for your money.  Show them that you know what you're talking about.  Show them your savings stragety. 

Maybe ... just maybe ... they will consider opening that account for you 'in trust'.  That simply means that the account is in both your name and the name of your parent(s).  They have the control over the account which will be turned over to you when you reach the age of majority. Of course, there is a bit more to it than that but if you think it may be an option then you know what to do ... research!

A quick recap:
  • Compound interest is the key to any successful financial plan
  • A fraction of a percentage point makes a difference
  • The more often your money is compounded the better
  • Use your parents to open a 'trust' account if it is best for you
Just as a reminder of the last post - what you do with your money is YOUR decision.  Be 100% sure before you act because there is no one to blame but yourself.

Here is a link to an online compound interest calculator.  Use it to try different scenieros.  Search 'compound interest calculator' online and explore some other calculators and learn more about how compound interest is calculated. Your bank site may even have a compound interest calculator there.