Sprinkles on top of ice cream, ketchup on top of hot chips and interest on top of interest – some things are even better when you add a topping.
If you’re looking to save more and reach your financial goals sooner, you’re going to love compound interest.
Get more bang for your buck with compound interest.
Albert Einstein once said, 'Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.' Something that has one of history’s brightest mind’s tick of approval must be worth learning about.
Compound interest is interest paid on the initial principal (the original deposit) plus the accumulated interest on the money you invested. Think of it as a cheese pizza with extra cheese on top.
That’s because you earn interest on:
- the money you deposit (the principal amount)
- the interest you have already earned, which is added to the savings account balance.
Voila! Interest on interest!
How to calculate compound interest.
If you’re looking to stack your savings, compound interest will help grow your savings faster. It can also be a smarter way to beef up your savings kitty, as shown in this compound interest example:
If you make regular deposits of $200 into your savings account every month for 5 years, you’d have a total balance of $12,000 in 5 years’ time. With compound interest calculated and added to your balance monthly, you’d earn $768 in compound interest after 5 years, giving you a total of $12,768.
How? You earn interest on the $12,000 as well as the interest paid into your account – that’s money for doing nothing, nada, zilch! To understand the compound interest formula and see how much compound interest you could earn, check out the MoneySmart compound interest calculator.
Frequency of compounding.
The frequency of compounding can make a huge difference to your savings goals. Your interest could compound daily, monthly, quarterly, half-yearly or annually – but the more often interest is compounded, the more money you’ll earn. Remember, the magic of compounding is about interest earning interest.
Compound interest versus simple interest.
Traditional interest (know as simple interest) is interest you may be more familiar with. It’s where you earn interest only on the money you deposit into your savings account. A term deposit is an example of an account that earns simple interest over a fixed term.
When it comes to borrowing money (including loans and credit cards) simple interest is better. You’ll be charged less interest so you can pay off the debt sooner. On the flip side, if you took out a loan that compounds often at a high-interest rate, you’ll have higher monthly repayments that could eat up your budget.
Compound interest is where the interest earned is added to the balance of your savings account (or investment), then the future interest is earned on the updated balance.
Compound interest grows over time.
The beauty and power of compound interest is that it grows over time, as your balance grows. Make compound interest work for you by stacking your savings into one account and earn interest on your interest.
The best way to make the most of compound interest is to give it time. When you let interest compound, let’s say over 30 years, it grows exponentially. Compound interest should play a role in your long-term savings strategy. The most important thing to remember is you need to start saving now.
And then there’s bonus interest.
Bonuses are one of life’s simple pleasures and a smart way to make your savings stack up nicely towards your goal. Bonus interest is often the higher amount of interest offered, so if you’re looking to take advantage of compound interest you’ll want to make sure you qualify for bonus interest.
Bonus interest is a simple and rewarding way to reach your financial goals sooner. Different banks have different bonus interest savings account offers and incentives, so it pays (literally) to do your homework.
As the name suggests, bonus interest is when you’re awarded an additional interest rate on top of the base rate. Earning bonus interest often comes with a few conditions but you can easily adjust your spending habits to meet them.
Earn bonus interest with ME and enjoy guaranteed savings growth.
When it comes to saving smartly, choose an account that compounds interest and rewards you with bonus interest. These types of savings accounts ensure your money works harder so you can reach your financial goals sooner.
To see how much you could save, crunch the numbers on our savings calculator and make a plan starting now.
If you’re interested in saving and earning money without lifting a finger, then it’s time to get acquainted with compound interest.
Watch your savings stack up with SaveME.
With no monthly fees or confusing criteria, you can crush your savings goals this winter.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.