Believe it or not, it is possible to make money just by saving money thanks to the miracle of compound interest. As one of the most basic and safe investment tools, this savings technique can really add up over time. Putting aside a small amount of money every month makes a difference, especially with interest rates attached to the account. By agreeing not to touch the invested money, virtually anyone can increase their savings or investment balance. Over time, by allowing the interest to sit, one can make even more money – all without having to lift a finger. Let’s take a closer look at compound interest and how this small idea can give a huge boost to your savings and investments.
How Compound Interest Works
Each month, a person needs to set aside a certain amount of money to be put into some form of a savings account. The interest that the bank or institution pays on the account can then be re-invested, which means the free money then makes more money. All a person has to do is let the principal amount sit in the account along with the accrued or gained interest. Then, each month, one will earn even more in interest. It is important to know when interest is added up or compounded as the compounding schedule will be a critical factor in how much additional money your savings or investments earn.
Leave the Principle or Original Amount Alone
By letting money sit in an investment account, one is less likely to spend it. This is especially true once a person sees all of the interest adding up; with a bit of discipline, one can double their money (or better) within a short period of time with very little risk. This is why it is important to look for savings and money market accounts that come with high interest rates; these can really pay off later on down the line.
Every little bit counts when it comes time to save money. Adding just a small percentage of one’s weekly or monthly income to a savings account adds up over time. The more money is an account, the more interest a person will make. This is why many people set up automatic deposits into their accounts. Getting into the habit of putting money into a savings account makes it easier to save for a rainy day.
Different Savings Accounts and Interest Rates
It is important to look to see which savings account have which interest rates. Some will have a minimum balance that is necessary if people want to earn any interest at all, while others will have very loose terms that allow for withdrawals and deposits as often as necessary. Understanding what a financial group has to offer makes it easier to secure competitive interest rates.
Relying on Interest is a Safe Investment Option
The best part about compound interest is that there is essentially no risk. Unlike stocks, there is no risk of losing one’s money as most savings, money market, bond and other investments are insured. This makes saving and making money safe, reliable, and less stressful than other investment options. After all, interest rates will stay the same and one’s initial deposits are never at risk. All a person can do is make money, which is the whole point of saving. The downside is that lower risk options like basic interest generally don’t offer much in the way of growth, which means that it can take a bit longer to see real results.
Making money is easy if people get in the routine of saving even the smallest amount of cash every single month. This is a chance to really dig in and make the most of one’s funds. Compound interest makes it easier for people to stay motivated to reach their savings goals, which in turn makes it easier to save for college, to buy a home or car, and to plan for retirement. Learn the ins and outs of compound interest and you’re sure to make at least a bit of extra cash. Good luck!
Andrew Jameson is a real estate financier, author and blogger who enjoys helping newcomers learn how to maximize their financial position. To learn more about compound interest and how it affects your finances, Andrew recommends this compound interest calculator from the folks at InterestCalc.org. Thanks for reading!